Loar Group: Pacific Piston Ring Company

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

We've been following Loar loosely since it was private, and now that it's gone public. We're trying to understand more about the types of companies they've acquired and the items in their portfolio. It seems they've acquired a range of slightly different companies. I'd love to step back and just get a bit of background, family history, like, how did this business come about? I'd love to learn a bit more about that.

Pacific Piston Ring was started in 1921 by my great grandfather. He was one of the first Los Angeles police auto mechanics at the turn of the century. While working on cars, he discovered he was dissatisfied with how the piston rings were functioning in the vehicles. He decided that a better part needed to be made. During that time, it was possible to gather your friends and start a new venture. So, he began manufacturing these sealing rings, initially for automobiles.

This business evolved during World War II when the government mandated that all efforts be directed towards the war. They asked who could manufacture what, and since we could make a sealing ring, they explored using it in aircraft. This inadvertently led us into the aerospace and military sectors, which, as you probably know, are now highly regulated with significant barriers to entry, including extensive approval processes and high costs.

From the 1940s onward, after my great grandfather passed away, my grandfather, who was a mechanical engineer, inherited the business. He continued to run it as it expanded in Southern California, a hub for many aerospace companies and niche suppliers. The proximity to other suppliers facilitated our growth.

Over time, we noticed that the automotive and industrial sides of the business were not as profitable due to competition from foreign companies with lower labor costs. Thus, we began to focus primarily on aerospace. This led to engagements with top customers like Honeywell, Parker, and Dukes - now Aero Fluid Products - who in turn supplied to Boeing, Airbus, and GE.

We were probably a tier four supplier in the aircraft supply chain. Despite being a small business without any debt, we focused on what we excelled at, which was making sealing rings for pneumatic systems ranging in size from three-sixteenths of an inch to about 14 inches in diameter. We left the larger components to competitors like Airtomic and Precision.

We had employees who were with us for their entire careers, and their children also came to work for us. This allowed us to perfect the art of making piston rings that performed optimally. Despite having advanced machinery, there was still a significant amount of skill involved in working with the metals and understanding how to manipulate them, skills that our employees mastered over many years.

What were the major product lines then, and which products were going to Honeywell, for example?

We had numerous part numbers at Pacific Piston Ring, but we never knew exactly where our parts ended up. We simply manufactured them according to the blueprints and dimensions provided. However, I would estimate that 97% of our top 50 part numbers were for Honeywell products.

And you wouldn't even know whether they were for OEM or aftermarket, then? You just manufactured them?

We knew that most of the market was generally off-market, but due to the replacement factor, we were aware that there were a lot of Honeywell parts. Many Honeywell parts were managed under VMI, Vendor Managed Inventory. Are you familiar with how VMI operates? Over the years, Honeywell began pulling parts from our inventory. For instance, we sold 10,000 rings with the part number ending in 1090 to Honeywell over the year, and they would take out 400 of those the following year, moving them to VMI. We then had to manage this inventory, watching for overstock or understock situations. This process led us to observe many top parts transitioning to VMI, indicating these were replacement parts that needed constant replenishment.

You managed those replacement parts under VMI and handled the inventory?

Yes, exactly.

Was there a specific amount of inventory required per part, or how did that work?

Yes, managing the inventory became quite challenging. I think this is where Loar has an advantage and presents an interesting business model. Many suppliers, often three to five tiers, started as similar small family businesses. We had a host of engineers at the turn of the century, and the business was passed down. My mother and uncle inherited it after my grandfather passed away, having run it for 40 years. I was brought in due to my mother's deteriorating health and my uncle's desire to exit the business. My background is in finance, so I focused on ensuring we handled the transition correctly and found the right buyer if we decided to sell.

However, there's ongoing consolidation in the industry due to many small businesses having niche products but lacking capacity. VMI is supposed to benefit both parties but often becomes cumbersome for small businesses. My uncle, who managed the contracts, had his role shift significantly to just monitoring inventory on a computer, facing penalties for overstocking or understocking. Meanwhile, companies like Honeywell would lock us into long-term contracts at fixed prices for 18 months without considering fluctuating raw material costs. Being a smaller business, we didn't have much leverage, which is where Loar comes in. Loar helps piece together these suppliers, giving them pricing power and more leverage against larger companies like Honeywell, Parker, and Lockheed. We offer not just one product they need but 25, forcing them to negotiate with us on pricing.

Do you think that strategy can work, though?

I think it's going to give them a bit of a leg up. I do believe that Honeywell and those guys will still hold the reins because you obviously can't lose them as your main client. However, there are not a lot of options for them. We raised our prices, and we probably could have raised them even more. There wasn't really anywhere else they could go to get the parts.

You mentioned there are a few competitors.

For our specific product, piston and sealing rings, there are Airtomic, and Precision. But when it comes to the specificity required to make these rings, only certain manufacturers are approved on the blueprint. That's one of the reasons Loar can't change our name to Loar Holdings. It has to stay Pacific Piston Ring because that name is on the blueprint. If you start changing that name, then you have to go through the entire approval process again.

What blueprint?

The blueprint to make the part that goes into whether it's the auxiliary power unit or the landing gear or whatever.

The Honeywell part.

Yes, the Honeywell part, the GE part, or the Parker part. It's our name. It gets down to those specifics where you need to be an approved manufacturer. Think about Honeywell; we have this tiny part. Think about how many parts it takes to make these systems.

How much is the part? How much is it per part? Like a dollar or something?

Our average VMI price was probably around $65 to $70 dollars. It's just not worth it to them.

So, just on the certification process then, let's say I'm Honeywell. I've got this APU. I come to Pacific. I say, this is my specification. This is what's been approved by the FAA for my part.

And we're way down the line.

They have drawings and I guess the subsystems in that APU. So, does Honeywell come to you directly, or is it another tier two coming to you?

No, Honeywell's team will come to us directly with the print. Many of these now, we don't need to go through the print anymore. We have the print in our file cabinets. We just need this part number, another.

Has it not changed?

It might have an amendment, but really, it's old technology.

It's really like 20 years ago then, 30 years ago?

Oh, yes. For sure.

Wow.

It's truly fascinating when you start diving into all these planes from around the world.

So they come to you with these prints, and you already know the print. Then they say, I need 10,000 of these this year?

Yes, but really, there's not much interaction anymore with Honeywell. It's all through their portal; it's all transactional. It's less about relationships now. That's one of the reasons it became a more challenging landscape for a smaller business. Honeywell would ask for a long-term contract. We were always against going into long-term contracts, for the reasons I cited. But sometimes, they would come and say, "We want to buy this part," and it might be 10% of our sales one year. They'll want this part number on our VMI system and a price reduction over the next 24 months. Then the negotiations would start, and we'd say, there's no way. We're in California. We have wages, payroll was a large part, and we had a lot of expenses.

And what about the raw materials, like steel and such?

Yes, wire. We were one of the shops that did our own coiling. We bought wire from probably three or four vendors. Any increase in raw material costs is not cheap. Then we negotiate and play with, "If you want this price reduction here, we're going to have to increase this price here." We knew the other parts they needed and didn't have any other option to buy. That sort of became the game.

How would you know those parts they didn't have?

Just experience and having my uncle sit in that chair for 40 years.

You'd know that these are replacement parts for the aftermarket or older planes.

We had a good idea. Airtomic could produce sealing rings and had moved their manufacturing plant to Guaymas, Mexico. Precision was in Indianapolis, and their specialty was much larger rings. For smaller rings, it was really just us. That's why we ended up being on Loar's target list and being able to last as long as we did.

You focused on the smaller dollar unit rings, the $60, $50 rings, and let the other guys compete in Mexico for the bigger ones.

Yes, the other guys can handle the bigger stuff.

With this price negotiation, I guess Honeywell wanted to move more of their operations to VMI. What percentage of revenue did you see change in terms of how much was under VMI last year compared to, say, 10 years ago?

We sold the business early in 2020. Our last year, 2019, we had our highest sales. At that point, our top 50 parts were all on VMI. 10 years ago, probably around 40% to 30% of them were on VMI.

How does it actually work? Let's say they want all their top, fastest-moving parts on VMI, especially in the aftermarket. What do I actually say? Apart from putting you on my system and trying to reduce the price, how does it work? How do the contracts typically work? What do they require from you?

They just send requests, and it's all transactional. It's very rare that you're speaking to someone at Honeywell, which changed the business. It's all done through their portal. The portals have different sections, for example, contract renewal time. We go into the contract renewal, see the part numbers they added to the contract, and the prices they're demanding. We would then reach out to our representative and say, "This isn't going to work. We need to discuss this." That's how the conversations start. Originally, it's all through their portal, all on VMI.

Of our top 50 parts, if we were to lose Honeywell as a client, that would shrink our business by 60%. We both knew that. So, how can we work together? You need us, we need you. That's the conversation that would take place. Even when you mention, "This VMI thing, we have six people in our office, the rest are in a factory producing these rings. We're going to have to hire another person full-time just to monitor this, because the penalties if we don't are costly." It's just, "Well, this is how we need to do it. We have too many parts coming in here. This is how we have to manage it." You can see it from their side, too. Large companies, so many businesses. But it definitely was a struggle.

What are the penalties?

I can't remember the exact details, but there were fees, like surcharges. If you had a part that was overstocked, or if they didn't pull down everything and you shipped out pieces there, you were penalized, like, "We don't need all this." Or if it was understocked, that was a problem.

The crazy thing about VMI, which always drove us nuts, we compared it to a carton of eggs. It's like you go to the store, buy a carton of eggs, but I'm not going to pay the grocer yet until I make these eggs. I take them home, set them in my refrigerator. But when I decide I want to make scrambled eggs, then I'll pay you. So, we watched our accounts receivable increase. We were in a strong financial position because we didn't have debt. Our family owned the property, so the rental expense was minimal, and that's how we survived with this model. But a lot of companies are not going to be able to.

So when you went back to Honeywell and you said, "This is a challenge for us," I guess I don't really care too much. Then you figured out how to handle it. Did you just accept the price decrease for those more recent rings, or how did you manage to maintain your revenue and profit growth?

No, we pushed back. We just pushed back. And then there was silence. And then it was like, "Well, we need this part. Well, we need this price." It was like that.

How much pricing power do you think the company has in the products, given the shift into VMI? But they also need you. How do you think about the power that has?

I think we probably underestimated it, but at the same time, it was exhausting. We had a business to run. What Loar foresees is the pricing power, because during the due diligence process, it was all about those questions. What's on VMI? What are your top products? How much are you charging them? What's the volume? That's all they were worried about. And look, our margins were good. It was my uncle, my mom, and myself. We were happy with our margins.

But it's not 50% TransDigm margins, though, right, I imagine.

Oh, no, our gross was probably about 60%. And so it's a good business. We faced setbacks in California. Policies have changed over time, environmental, labor, and so on. So it does not surprise me. I mean, Loar sold, like, when they bought us, they moved.

They moved the facility. How much do you think they can increase prices? Loar, like you mentioned, 97% of the top products are on VMI.

Now with inflation and everything, they could probably double, if not close to triple our price per unit.

In the due diligence, what did they ask you? What type of questions were they asking you about price?

They did an analysis of the price increase. We would always increase it. Usually, the prices were increased by 3% to 5%. Some pieces might go up by 10%if there was a corresponding raw material that significantly increased or we felt that we were compensating for another price, that they wouldn't let us increase as much.

So there was always the advantage that we sold so many part numbers to Honeywell that we could kind of play around, and we were still non-VMI. So we were like, "Okay, if you want this on here, then we're going to have to increase this here." Like, we have to make up the difference. And so that was a lot of the negotiation and just kind of where the prices fell. But Loar was really specifically looking at what's the average price here? What do we think we can test the market with? There weren't many competitors, but also the barriers to entry are high. It's not like you're going to have someone just start up with a piston ring business.

How often did you increase prices over the last five years? Annually by 5%, similar to inflation?

Yes, on average, 3% to 5%, but that doesn't mean some parts might not have increased more.

Regarding the certification, let's say you have this APU, probably with a subsystem. You're a tier four. What exactly is the intellectual property that Pacific owns, if any?

We don't have much in terms of intellectual property. It was more about having in-house expertise. It was the people, because we had staff who had been doing it for so long, and we also had in-house coiling. We could minimize the risk. With our in-house coiling, you could tell immediately if the wire was faulty. This way, you wouldn't go through 25 steps of the work order only to find out the ring wouldn't test or perform properly. We caught a lot of issues right off the bat with the metal and the wire, which was an advantage.

There was a lot of blacksmithing involved, a bit of an art to it, which is one thing I am concerned about with Loar and how they transitioned the business. They made such a clean cut. Full disclosure, I was not happy. This is happening worldwide with consolidation, but they were very abrupt. They were not receptive to our employees who had been so loyal and had invested so much time and effort. They were just very cutthroat.

When they moved the business?

They moved it to Franklin, Ohio. There was just better real estate there.

And all the people there, where did they go?

I don't know. They went to different places. I'm in touch with a few. But they fired many of our head engineers for dubious reasons. They just didn't want to deal with them. I resigned because it was during Covid, and we had just closed the deal. My husband is a teacher, and I have three little kids. I needed to work from home, which they refused. So, I had to resign. It was impossible otherwise.

That seems a bit odd.

They did a complete 180. You hear these stories where they kind of seduce you to come in, and then they change. They weren't very kind to my mother or my uncle either. We just left it at that. But watching the fallout, I was really surprised they didn't take anyone to Ohio or offer that as an option.

They didn't even offer anyone. Why is that then? If the machinery is quite old and it's quite an art?

I don't know if they felt they could automate a few things, but from what I heard initially, they were having some trouble, which would be expected. I think they'll get it up and running. It's just, I question the quality of the product. Like, it's not that if the piece doesn't work, the plane's going to fall out of the sky. But still, I wonder if they're going to take some time to replicate this. And I think there was a bit of arrogance there. I talked to some of the other companies they own, and they said, well, this is just how they operate. They quickly acquire companies. I believe we were like their 11th or 12th acquisition, and I think they've taken on two or three more companies after us, and then they did their IPO. So it wasn't the most pleasant experience.

But what do they do with the machinery, though, like the property you had?

They took it all.

They sold the property then, or you kept the property?

We kept the property but they took all the machinery. They cleaned it out. They threw out a lot of inventory that was old. I think they tossed all that. But it was worthless. I don't think there was any value; it was more the automotive parts. When I went in there, the last time I went in there, they just closed shop in March of this year. So they are now fully in Ohio. And our purchasing agent was the last gentleman I spoke with, and he was toying with the idea that they thought maybe there would be a place, but he said no, and so no one went with them, which I think says a lot in terms of not one person went. Not one.

Wow.

Yes. So I don't know. I know they were moving our business in with Maverick Molding. I want to say that's in Ohio. We had a pretty big space here in Los Angeles. They didn't need all that space, so they were moving in with them and trying to consolidate. The other thing is possibly because our workers were unionized, and they didn't want to bring that along. That's a possibility because they did have concerns about that. But I think they kind of missed out on some knowledge. I think they left some knowledge on the table.

So now when Honeywell goes to Ohio with Pacific Piston Ring and Loar, will this be the same blueprint, but they're going to have to try and use the machinery or build new machinery to manufacture these rings, according to the blueprint?

They have engineers. There are issues or challenges with a family business that has been running for a long time. When I joined, it felt like stepping back in time, and it seemed very antiquated in the way my uncle conducted his business. I digitized much of what my mother was doing. There wasn't the investment, and Loar recognized this. There wasn't the capital investment in the business that could have streamlined it and increased its productivity, but that wasn't of interest to either of my relatives. Teaching an old dog new tricks can be challenging. So forget it.

Yes, there are ways they could streamline it and keep it moving. As soon as they purchased us, we had KPI reports that we had never done before, and I thought, 'Oh, this is good.' We could see the operational efficiencies and deficiencies. They immediately implemented an ERP system, Epicor, so they could have all their businesses on the same platform and do cost analysis. That's how they manage their business. I think the engineers were probably tasked with assembling the workforce and seeing the synergies with other businesses. We had written processes for every single part number, detailing how much time it takes, the measurements, how to operate the machine, everything. There were step-by-step outlines that they should be able to follow, but it's just a feel. There are probably more modern ways to do these things that they can discover.

So, back to Honeywell coming to Pacific now. They've got a blueprint, and Loar just has to manufacture according to that blueprint. What exactly is on it? You mentioned Pacific's name. What is Pacific certified to do, and who certifies them?

I wish I had one here, but you'd have a blueprint. In the corner, it says, 'Manufactured by Pacific Piston Ring.' When they go to assemble the part, that's the stamp of certification. There are all these regulations, like ITAR, ISO 9000, and various inspection requirements. A big chunk of our payroll went to inspection; how it has to be inspected, how it has to be tested, all of that. We would have inspectors and auditors constantly in our factory to ensure compliance.

The FAA certifies you for that.

It's Honeywell.

Yes.

But it's from the FAA. Yes, all of that is how they protect and enforce compliance.

So, you're a certified supplier to Honeywell and other customers, but you don't actually have a part number with the FAA or a PMA part, for example.

No, we're not. That's left for the big guys.

When Loar was analyzing that, what were they looking for to understand the certification?

They asked us a lot of questions and gave us a comprehensive due diligence questionnaire to complete. It covered everything from insurance and management to environmental issues and certifications. They asked if we had any issues with agencies or auditing. We had to disclose all of that, which we did. We had an excellent head engineer and head of inspection who had been with us for 40 years. He dealt with everyone and was very bright. He facilitated and oversaw the entire department, so we always trusted his oversight. I think there's still a lot of people management involved in the business, even in manufacturing.

Regarding Honeywell, how much do you think it would cost them in time and dollars to switch to a different competitor?

I'm not sure that there is a competitor out there for some of these products.

What percentage of your past revenue do you think could be completely replicated by somebody else? Where Honeywell could literally drop you and go to someone else?

You're probably looking at Airtomic or Precision. From what I know, they would need to acquire different machinery and focus on training for this area. It's a difficult question because, of course, everyone is replaceable at a certain price. It's about the time. There's such a backlog of parts that we are constantly just trying to keep up. That's all we're doing, trying to meet deadlines.

How long is the backlog?

It's hard to say. It changed during Covid a bit, but we were always about three to five months behind, just trying to get the parts out.

Pre-Covid?

Yes, pre-Covid. Then, as you move up the ladder, it just increases. Covid hit, and our revenues were down significantly, as were everyone's. Then there were the Boeing issues, which in some ways could help smaller suppliers catch up because they weren't able to deliver the planes. We could get the stuff out as they weren't starting on new orders. I'm not in it anymore, but I think we always felt like we were behind, and I doubt they've completely caught up. There's just too much backlog.

What percentage of your revenue, roughly, do you think was from aftermarket versus original equipment?

Most of it was aftermarket. I would say probably 65% to 75% was aftermarket.

And that's just your rough estimate, because you don't actually know where these are going. You just send it to Honeywell.

We don't actually know. Our conversations and experiences suggest that these rings are a very small part. They're probably on every plane, but they are extremely tiny.

How many are on a plane? How many on each plane?

It depends on who is manufacturing the APUs. We're in a lot of the hydraulic systems. Think of it as a sealing ring. So anywhere you have a pneumatic system that's creating energy, that's just going to seal it tighter. The number of companies it takes to manufacture parts for a plane is incredible. When you start looking into it, it's like 180,000 or something.

But you can't price differently for an aftermarket part and an OE part, then? You have to set the same price for every part number.

Yes, we based it on our costs. I feel we were very fair about that. We looked at our costs and our pricing layers. We had the luxury of historical data. If I could have taken a picture of our factory office, there were files of quote cards, as we called them. I could pull one out from 2000 for a specific part number and probably see five quote cards attached to it where my grandfather had written down the price when he sold it in '72, and my great-grandparent had written the price when he sold it in '56. Every single part number had all of this history, but none of it was in a computer. It was all just handwritten.

Yes, but you had 60% gross margins, and I guess you weren't paying rent on your property?

Minimal rent.

Yes, it was like market rent or whatever. Minimum. So, you could afford it; you didn't need to push your price like someone who has to pay market rate for a big, modern factory.

Right. Yes, the wages were the biggest issue because we had a lot of unskilled labor. The minimum wage in California kept going up and up. That was probably our biggest cost. But even then, my mom and uncle weren't taking a crazy amount out of the company.

Were they taking dividends?

Yes, it was an S corp, so we had distributions. The plan was to keep it moving and keep it running. Then age, health issues, and family dynamics got in the way, and we said, okay, wait, we need to look at this and see what our best exit options are.

What actually made you sell it then? What was the one reason that really made you sell?

The main reason my uncle wanted to sell the business was that he was tired and believed only a son could effectively run it. Unfortunately, he was not willing to train me or consider my brother as an option. It's your typical family business dynamic.

Did you want to run it or not? Were you up for it?

I definitely would have been up for it. It was challenging with my uncle because he was so focused on extracting money from the business. My concern was that I lacked the experience since I hadn't been involved from the start. In hindsight, it was a tough decision. Additionally, my mother's health was declining, so I knew I would probably need to get involved with her care.

That's his sister.

Yes, right. That's what initiated everything. Neither my uncle nor my mom had much insight into the process, but with my background, I suggested hiring a banker and an attorney to get the right people involved and take a proper look at the situation. We ended up working with a great team. We wanted to keep it small and tight and find the right buyer. We were responsible for a lot of families. Critical Point was our investment banker, specializing in aerospace companies in Southern California. We had interest from Heico, Trelleborg, RBC, and a few private equity firms. TransDigm was not involved. We thought Honeywell might be interested, but they were not.

They just said no?

Yes, I ran it up the food chain, and they came back with a no. Interestingly, my uncle had signed long-term contracts with Honeywell and Parker, which included a provision.

When there is a change of control or something?

Exactly, a change of control. They had to provide consent, so we waited on that.

How long are the contracts that were signed with Parker and Honeywell, roughly?

12 months, 18 months, not any longer.

Okay, not too long.

Yes.

So why did you choose Loar over Heico and others?

Loar seemed to be a more strategic fit. I felt that Heico didn't understand the goal of continuing the business. They focused primarily on my uncle and didn't engage much with us, which was a downfall since we owned 50% of the business.

You and your mom, basically.

Yes, I was like, we can't agree to this. They were having separate conversations with him. And I said, now this puts me on my heels. Why are you guys having separate conversations? We've been running the operations people. And so that was their mistake. And then Trelleborg, they had just closed their plant in El Segundo. So we discussed that and said, I don't think they're looking for another place. I think they're going to get in here immediately, shut it down and go their own way. So we felt like that was just sort of a death sentence for all of our employees because they were struggling a bit at the time. The private equity guys, we didn't like them. They kind of came in and said, oh, we're just going to throw lipstick on this and flip it around. And it just didn't seem like it was any sort of idea to grow the business.

They actually said that to you?

No, that was sort of my interpretation.

You just knew?

Yes, I had dealt with those guys before, and then Loar, I really liked Brett Milgrim. We had some really good conversations about what they were looking at, what they were trying. They just seemed to be more in depth of what they wanted to do with the business. I knew they would probably move eventually. And we couldn't fault them for that because of the changing landscape in California and difficulties. But I didn't anticipate how they would treat the employees, but I think it was because we felt they weren't just going to inject it with a little caffeine and then turn around and sell it. It was going to be more investment.

But Heico annoyed you because they didn't even speak to you?

Yes, Heico, I felt like, and it was the head guy who - and not ageism by any means - but he was a lot older. And he just seemed very hands off. Like, he didn't seem like he knew the business. It was very much like, oh, we're just going to come in here and we'll take it. You know, we're going to get robots doing all this and blah, blah. And I was like, do you really even understand our business? Do you care to understand our business? Because this is not resonating with me. I will say, Loar was aggressive on price.

It wasn't double, but we ended up sweetening the deal because we were worried about our employees. And so they, and they met it. We came back and we said, we want X amount of dollars set aside for our employees to bonus them out for this year and then give them a retention bonus if they stay for two years under your management. And they agreed to it. And I'm really glad we did, given the way they treated them.

That was a good move. Yes. And that was on top of the original multiple.

Yes.

What was the rough difference in percentage? Was it like 50% more than what Heico offered?

I'm trying to remember. There was a premium. It was probably around 15%.

If Heico had offered more, what would you have done?

I would have had more meetings with Heico and discussed things further because I understand the importance of starting off on the right foot. It's a great company, definitely a good company, but I wanted to delve deeper into how things were going to work, especially since Covid hadn't hit yet and I was planning on continuing to work.

Yes.

That was essentially it.

What did Loar say they were going to do with the asset? What was their pitch to you?

They were pitching that they were just going to grow the business. They planned to literally take it and start expanding aggressively. That was their big vision. They knew they had the pricing power on many of these parts to make moves. They recognized that.

Did they know how many parts they had pricing power over, or did they estimate?

Yes. They asked what we thought we could increase the price to, and we thought you could probably double it.

So why didn't you do it before?

We didn't feel like we had as much leverage before. They were coming from a position of strength, and we felt we weren't being aggressive enough. But at the same time, we were cautious not to upset Honeywell.

Right, I understand. In my business, I know I'm giving guys a great deal because I somewhat like them, but I know I should be charging more.

Yes, it's always a matter of whether we should charge a little more. I think a gradual increase would have been more justified.

And it would have been definitely more validated had we done it. I think we could have streamlined operations, which ties back to the family dynamics. I'm much younger than my uncle, and there was a need to upgrade our manual systems. We really should have. They had a clean slate, they could come in and revamp the system, implement an ERP, and digitize everything, which would save so much time. All of that could be very streamlined and definitely increase the margins, but they would have to invest capital into it for sure.

How much do you think they were planning to invest in it? Roughly, what kind of capital expenditure was required?

I didn't get that information. We didn't have that conversation. We just discussed how some of these machines, despite being old, are pretty amazing. They keep going and keep producing. We had a lot of engineers on staff who could fix anything if they broke down. But I feel like the machines made 50 years ago are a lot stronger. Some of the machine were 50 years probably. Yes, it was a time warp.

I'd love to see a picture of it.

Yes, we had some machines that had a plaque on them because they were used during the war. They would say, like, produced so many parts for, you know. Yes, I have a picture somewhere.

You have to send it to me. That's amazing.

Yes, I will. It was pretty cool. But they're doing it now, right? They're investing in the people.

So they invested, you know, millions of dollars to buy new machinery.

Yes. But they'll get it going. Like I said, they have all the outlines. They have all the knowledge. They are, I'm sure, making the top parts and focused on that, and they'll probably say, we're not going to make this anymore, and cut off the bottom 50 because that just doesn't really make sense. We were just doing it for goodwill and to continue how it had run for a hundred years.

How much do you think they could increase the margins then, in your experience?

We ran some scenarios on that, and we were in the high single digits, low double digits.

EBITDA?

Yes. Could it be more? Maybe. I don't know. I just felt like it was going to be around 10%.

EBITDA margins, you think?

Yes. That's what we were looking at.

But that was without paying rent, right? So with the price increases, if you go and pay rent again, there's an offset.

They locked in the rent that we were paying because obviously that would have just come down into operating expenses. So when we sold the business, that's why they moved. We locked in that rent until, I think, 2024, and then we had a rent increase. Yes, that's why they left.

You could have really hiked the rent on them because they let go of all your people.

Yes. We definitely could have, but they were smart enough to know that.

Damn it.

Yes, I really wish the best for them. I think their stock could be really interesting over time. Personally, I am long on aerospace and defense because I believe in it. I think there will always be geopolitical risks, and we will continue to advance in that space. They did well.

Have you looked much at TransDigm?

I looked at TransDigm when we started talking with Loar. That was always Dirkson. Whenever he gave a presentation, that was his model. Like, here's TransDigm.

What did he give you a presentation about?

Well, he would always say, look at TransDigm's total revenue and look at where we are. Look at how easily we're going to be able to surpass them with this. If we're acquiring this company, this is where we can be now. We have all the niche companies. Just trying to motivate all the executives at each of his companies because that was always the goal. He always said we're going to go public. He would have done it probably in 2022 if it weren't for Covid.

What do you think of Dirkson, since you mentioned you like Brett. Was Dirkson involved in the deal then?

Yes, Dirkson was. We talked to him a lot. I think Dirkson had a vision. He didn't want to stop to obtain that vision and just pushed through. It's probably hard in his position. For example, when I said, Dirkson, I'm sorry, I've been able to do my job, I just need to be at home. We have too much going on with Covid. I think it's really unrealistic and just sort of unbelievable what's happening around the world. I think you guys have to resign to the fact that some of us are going to have to work remotely. And he wasn't very understanding of it, even though he was working remotely and his team was working remotely. He felt like he needed someone on-site at the factory. At the time, if you remember, we didn't really know what this was.

I thought it was illegal. I thought you weren't even allowed. We weren't allowed here in the UK.

Yes, I don't think you were, but I think we were on the borderline because we made defense parts.

It was critical, right.

Yes.

Got it.

I just didn't know. There was pressure at home and pressure with work. I didn't want to work with people who wouldn't be understanding. I knew you were probably going to move at some point. Maybe it was a good time for me to exit. Then, they ended up having someone work remotely anyway. I think they didn't really want the family there. I wish they had been more transparent. That was my only issue with Dirkson. I wish they had been transparent upfront, saying, "Look, we're taking this business off your hands. It's your decision to sell to us, and this is our intention. We don't really feel that the family needs to be involved anymore." That would have been fine. Yes, that was disappointing.

Do you feel like you got a good price for it?

Yes, I think so. Considering it was six weeks before Covid hit, we felt like, wow, we did a great thing.

But when I talk to the employees, I kind of feel like, ugh, I should have kept it running. I really should have kept it running. There would have been challenges though. The landscape is getting tough, especially for the little guy to fight against a duopoly. And now with Boeing issues, I can only imagine they're probably trying to get more clout with Airbus. There's a lot of pressure in that system right now that would be challenging. But I enjoy finance, so I'm back in finance.