Turnaround Team

When David Schmidt was hired four years ago to run aerospace manufacturer Hydra-Electric Co., his stated mission was to prepare the company for sale. Schmidt achieved that goal this month, when the Burbank business was sold to Loar Group Inc., a New York-based manufacturer and supplier to the aerospace industry. Schmidt came to Hydra-Electric in July 2015 and set about fixing a company that was struggling. Since his arrival, the maker of avionic sensors has turned around. “It has doubled its sales since I’ve been here,” Schmidt said. “It is probably in the top 3 to 4 percent of profitable businesses in the aerospace market.” According to Gerry Schauer, chief financial officer, who was hired a year before Schmidt, the company sold for about $100 million. Four years ago, it had a valuation of about $10 million, he said. “We took the company from generating net operating losses and burning cash to generating cash and having a reasonable margin on its products,” Schauer added. Hydra-Electric has a workforce of 185 employees that develop and assemble switches and sensors used on practically every type of commercial, military and business aircraft. It also provides its products for missiles, spacecraft, ships, armored vehicles and drones. The company occupies 45,000 square feet near the Hollywood Burbank Airport. It has about 1,000 names on its active customer list. “It makes you attractive to bigger companies when you’ve got everybody to sell to,” Schmidt said. Key turnaround decisions The fundamental problems the company faced were poor delivery, not making delivery dates, which severely affected its reputation and bad pricing, stemming from poor cost accounting of the manufacturing process, Schauer said. “Once we fixed these issues unit volume, revenue and margins improved significantly,” he said. A challenge the management team faced was that the turnaround was self-financed, so cash was tight at the start, he added. Another challenge was attracting and retaining talent with a turnaround then sale on the horizon. “Fortunately, the board recognized that and allowed us to implement a Stock Appreciation Rights plan that helped recruiting and incentivizing the talent we needed,” Schauer said. Attempts to reach Loar Chief Executive Dirkson Charles were not successful. But in a statement, Charles said that Hydra-Electric was the company’s eleventh acquisition since the company was founded in 2012. “Hydra adds another proven innovator and problem-solver to Loar which further enhances our ability to solve our customers’ unique challenges,” he said in the statement. Loar keeps the names and industry identity of companies it acquires. Others under its umbrella include SMR Technologies Inc. in Fenwick, W. Va.; Freeman Co. in Yankton, S.D.; and BAM Inc. in Knoxville, Tenn. Hydra-Electric management hired Lincoln International, a Chicago-based investment banking firm, to put the company on the market. Because of its legacy and longevity in the aerospace industry – the company was founded 71 years ago – it attracted attention with a list of 100 potential buyers. Out of those about 40 put in bids on the company. “It is rare for a company with this legacy to pop up and become available,” Schauer said. Continuing that legacy and its products was important, according to Schmidt and Len Torres, the chief operating officer who makes up the third person in the turnaround triumvirate. So, they were looking for the right owner and not just the right buyer, Schmidt said. “The right buyer has the price. The right owner has the right price and the right strategy for the business,” he added. “Loar had both. The management team felt they would be the right fit for the company and its people.” “Loar has the resources and the willingness to reinvest in the business, to continue to grow the business, which works well for us and the people here,” Torres said. Ownership drama Schmidt is confident that Allen V.C. Davis, the founder and long-time owner of Hydra-Electric would be happy with the sale. Davis passed away in December 2015 at the age of 91. But prior to that, after he was diagnosed with Parkinson’s disease, Davis had put the company and all his other assets in a trust and bequeathed it to a local university. The reason Hydra-Electric did not stay in the hands of the Davis family, Schauer said, is because Davis had a falling out with his daughter over the ownership of another company he had started, Custom Control Sensors. Davis thought he owned the company while his daughter and her husband had paperwork showing they owned it. “They went to court and won,” Schauer said. “So, Mr. Davis more or less stopped having anything to do with his daughter. It’s one of those sad stories where money gets in the way.” Custom Control Sensors, in Chatsworth, makes sensors and switches for aerospace and industrial uses. The local university that took ownership of Hydra-Electric after Davis died held on to it long enough to get it into a condition to be sold. The company had been struggling and there were different managers running it that did not have an aerospace background. That changed with Schmidt, who previously worked for Hartzell Aerospace, Meggitt PLC and Esterline Technologies Corp. Torres came with 28 years of experience in aerospace, electronics and commercial product lines, while Schauer had a background in helping turnaround financially struggling companies. “We took the company and went on a five-year plan to get (it) ready for sale,” Schauer said. Sector consolidation The aerospace industry has been consolidating for 40 years, so the sale of Hydra-Electric is typical and a normal part of the industry, Schmidt said. “We are pretty small on the food chain but still a part of that consolidation,” he added. The sale also shows that it is possible to build high-quality products in the U.S. and Los Angeles County, make a profit and be an attractive business to sell. Schmidt labelled the aerospace market in the Southern California very competitive yet one that has not been driven out of the area. According to a 2016 study by the Los Angeles County Economic Development Corp., the aerospace industry cluster lost about 16 percent of its jobs between 2004 and 2014. In 2016, total industry employment stood at 90,100 jobs in Southern California, the group said. Workforce issues were identified as being the industry’s biggest weaknesses. In executive interviews for the study, 57 percent of the respondents said finding qualified applicants was a task with great or some difficulty. That is a dilemma that Hydra-Electric has found itself in, Schmidt said. “We cannot find people to hire, even with good wages and good benefits,” he said. As for his own employment with Hydra-Electric, Schmidt said that he doesn’t know if the new owners will want to bring in their own person as chief executive. It is not unusual for a change in leadership with the ownership of a company changes, he said. “I was hired to bring the business to market – to get it fixed and get it sold,” Schmidt added. “Sometimes they’ll want a different person to continue to run it.”