Describe the process that leads to the creation of the new businesses.
It's centered around our sales meetings, which we hold twice a year -- one in June and one in October. We tell people, "Give us your honest-to-God forecast. We'd love to see 15 percent growth. If we get 6 percent or more, that's OK, but tell us what it would take to get to 15." Generally, we prefer to grow organically, increasing sales of products we already make and selling to customers and markets we already have. Organic growth is the most profitable kind. Your margins are always better when you grow with something you're already strong at.
But we want people to have new products and new markets lined up in case they can't reach their goals organically. Those are the contingencies and trapdoors. Let's say one company needs 100 people this year and projects it will need 106 people to handle its growth next year. At the sales meeting, its representatives tell us how they plan to do it in terms of product lines, customers, and the marketplace. But they also have to consider that they might be wrong. So we ask them to come to the meeting with an additional 15 percent of sales in what-ifs. What if they can't cover the 106 people? Because if they're wrong on the forecast, they're also wrong on somebody's life.
And 15 percent is the magic number?
We want at least 15 percent of our projected sales in research and development at all times. The whole idea of the trapdoor is that if something happens, we can rush that new product to market, or we can rush that product we already have to a new customer. We look at a variety of factors. For example, one of our companies makes agricultural machinery, and agriculture tends to be good in the spring and the fall, but there's a gap in the middle. We asked ourselves, "What sells in the summertime?" The answer: refrigeration units. So we put refrigeration units in there. It was a contingency. We began to develop a lot of contingencies like that, and some of the contingencies ultimately became businesses.
Is that why you've done so well despite the current downturn?
Yes. Look at SRC Automotive. It remanufactures automotive and marine engines. Its biggest customers are Mercury Marine and General Motors. Our GM orders fell off a cliff in November. Up to then, we'd been doing 800 to 1,000 engines a month for them. In December, we sold 212 engines. Marine got hit hard, too. It was a tsunami. If we hadn't had these contingencies and trapdoors, we would have had no option but to lay off 35 percent of the work force and wait until the business came back. We figured that would be at least five or six months.
I take it that's not what you did.
Fortunately, we didn't have to. We were able to move some of the people into our other companies that needed the extra manpower and had jobs they could do. We also found a Missouri program that helped us out. Instead of laying people off, we put them on a four-day workweek, and they collect unemployment for the days they aren't working. On their days off, they wind up with about $10 less than what they'd been making, but that's a loss they can handle. Meanwhile, we bought time to execute our contingencies.
What did you do?
One of automotive's contingencies was to build natural-gas pumping units. They'd been looking at that opportunity for a year or more. When the cuts came, they went after the business. They also had their eye on remanufacturing engines for the postal service. So by February, automotive was back to a five-day workweek. March was a full month as well. In three months, they repositioned the company. And now, if their two main customers come back to normal levels, they'll be stronger than ever. In fact, they'll have to start hiring people.
That's impressive.
But understand, there's no way to develop new markets and new customers if you lay people off. How are they going to do natural-gas pumps or the post-office business if they've gotten rid of the people who do the work?
Is this the process you use in all the companies?
More or less. Our program is the four Ps: people, profits, positive cash flow, and positioning. We're saying to ourselves, "Look, we got this far by creating jobs. We've done all this to build the type of culture we want -- a culture that puts people at the center. What are we going to do to keep it? How much are we willing to invest in keeping it?" I'm willing to give up profits if the losses go to repositioning the company, so that when we come out of this thing, we're stronger than when we went in.
We had two months when we lost $200,000 while we were executing the contingencies and moving people around to keep them employed. But that's money we were going to lose anyway, and we were able to keep our cash flow positive by dropping our inventories. When you sell finished goods that were in inventory or when you don't buy as many parts to put in inventory, you have more cash. Of course, it doesn't hurt that we have so much cash in the bank -- enough to carry us for three or four years.
Where did that come from?
That was the result of another contingency. A little more than 10 years ago, we started a joint venture with John Deere to remanufacture diesel engines for its agricultural and construction equipment divisions. We'd been looking at Deere for a while as a potential way to diversify SRC Heavy Duty. That particular contingency turned into a business fairly quickly. We became 50-50 partners with Deere in the joint venture, which we called ReGen Technologies, and we each had an option to buy the other out according to a formula we agreed upon in advance. Last year, we mutually decided that the time had come for us to exercise the option and sell our interest in ReGen to Deere. This was several months before the financial crisis. The deal closed at the beginning of November and put all that cash on our balance sheet. Suddenly, we looked like the smartest guys in the world.
