Chapter 14

It was late July and a very hot summer day in Milwaukee when Cliff got a call from Steve Muller. Steve sounded excited and asked if he could come over to see him. Cliff told him to come anytime and a few moments later he came into the office followed by Sandy Donnell and Carlos Murphy.

Carlos was their find of the year. He was a third-generation Argentinean, educated in the States. Despite its spelling, his last name was pronounced Mur-pee; Carlos spoke of his grandmother, a native-born Argentine, who never spoke a word of Spanish in her life. And, he claimed, never understood what she called "that heathen tongue," referring, of course, to Spanish. Carlos was from a town in Argentina named Murphy, as well.

Steve was never sure if they found Carlos or he found them. He was only twenty-six years old and had earned his MBA from Babson College. He had joined the company to lead its drive to increase export sales and had just returned from his first sales trip to South America.

One look at their faces told Cliff the trip had been a success. He whispered something to Sandy who grinned and left the office. "Carlos, how did it go?"

"Well, Boss, they loved our special Latin American program!"

The young man grinned broadly as he said it. The special Latin American program consisted of the most elementary things: translating the packaging materials and instructions into Spanish, preparing normal export documentation, and accepting export letter-of-credit financing. Murphy Manufacturing had never done any of those things before. Moreover, as far as anyone in the company knew, Carlos's trip was the first time anyone from Murphy had ever visited Latin America on business.

"I only went to Mexico and Venezuela on this trip. It was the funniest thing I have ever seen. My first stop was Mexico City. I had a couple of names and telephone numbers of companies that had bought from us in the past on our usual export terms. I called the first name on the list."

The "customary terms" had been cash in advance, with buyer taking delivery at the Murphy shipping dock. Any special export arrangements were the buyer's problem. The only thing Murphy did was provide heavier-than-normal crating, and even that had been provided with great reluctance.

"At any rate, I introduced myself and asked for an appointment. I thought the guy was going to faint when I said I was down from Milwaukee and actually spoke Spanish. Anyway, he wouldn't hear of me coming out to see him. He came dashing down to meet me at my hotel. I guess he made a call or two before he left his office, though.

"I wasn't off the phone five minutes when it started to ring. Other auto supply people heard I was in town. Anyway, the first guy, Señor Gonzalez, arrives at the hotel, and I met him in the bar.

"Cliff, I never got out of the damned bar. And I didn't even pay for a drink. Incidentally, you know what impressed them the most? The fact that Murphy Manufacturing had an export sales manager, and was actually interested in supplying them on a consistent basis. Their history with us — and a bunch of other American auto parts companies, apparently — is we only sell them if, as, and when we have a little extra capacity. They're typically turned off more than they're on.

"Anyway, here's what I got." He took a stack of signed orders out of his briefcase.

Sandy noted that every one had a letter of credit attached. She noted, "These are prepaid orders, if I understand this stuff. Moreover, every one of the LCs is on an American bank. As I understand it, we ship the stuff. When it's received in Mexico, the LC is released and we have our cash. Right?"

"Right! Then I went to Caracas, and the same thing happened, only more so. They have more money and more big US-built cars. We haven't totaled it all, but it could total almost as much as the first Kaga order!"

Just then there was a knock at the door, and Sandy got up. She returned to Cliff's desk with a brown paper bag that had been handed to her. Then she took out a cold six-pack of beer and opened cans for everyone. "This calls for a celebration! It's hot, this is a manufacturing company — we get our hands dirty — so beer's in order. Cheers, Carlos, and congratulations!"

That afternoon, Sandy buzzed to say there was a Kelly Cameron to see them from Snyder Securities in Chicago.

"Oh, shit!" Cliff said. "I completely forgot, and the tone of your voice says I never mentioned it to you, either. Cameron is a securities analyst. I think he's the only one who follows Murphy. I was supposed to see him in April but I ducked. I guess we have to see him. Do you have time to put on your treasurer's suit?"

"Sure. I'll ask Betty to go bring up Cameron, and I'll join you in a few minutes."

Betty Ames was looking beautiful when she showed Kelly Cameron into the office. Cliff was surprised to find that Kelly was a girl, and his surprise showed on his face. The young woman appeared to be under thirty and was very attractive. She was five feet four, with short, dark hair.

She smiled and introduced herself. "I apologize for the misrepresentation, although it really isn't. My name really is Kelly. My interest is manufacturing companies, particularly automotive-related ones. A lot of your colleagues in the industry don't like dealing with women, so I guess I go out of my way not to mention that I'm female."

When Sandy entered the office and introduced herself, Kelly looked at her closely. "Miss Donnell, you're the Murphy family of Murphy Manufacturing, aren't you?"

Sandy was startled, but decided the meeting was essentially on the record. Lying to an analyst wasn't smart and could possibly cause problems with the SEC. "Yes, I guess I am, if you mean the family stock is mine. It is ... or will be in a couple of months."

Cameron took a seat and started right in. "Mr. Fitzpatrick, Murphy hasn't been going anywhere to speak of. I estimate your current sales are in the range of $500 to $600 million. For the last few years — too many years — the company has been earning about 1 percent on sales, net. That generates five to six dollars in earnings per share on the one million shares outstanding. With no growth and uninspired profits the market has been giving you a multiple of about five. The trading range for the last few years has been $20 to $30 per share.

"I recently received a tip there are major problems here and came to find out about it. First, I will tell you what I have heard, and then you can comment. Number one: You have been cut off as a supplier to Magna Motors. That was reported on the broad tape. It's about half your valve and ring business, maybe more. I would estimate the loss at about $200 million a year in sales.

"Number two: You have sold off a whole bunch of your auto parts stores. I would guess maybe two-thirds of them. That's another drop in sales of about $65 million or so.

"Add those together, Mr. Fitzpatrick, and Murphy has lost about 50 percent of its sales give or take a bit. I'm looking for your profits to drop like a stone. How am I doing? Oops! One more thing: the word around is George Simpson of Ajax hates your guts and wants to destroy you. Comment?"

"With no flattery intended, I'm impressed. You obviously know the businesses you follow and not all of your colleagues do. Let me take your comments in order. First, the history is obviously correct: the level of sales, profits, number of shares, and so forth. With respect to Magna, you are also unfortunately correct. We lost the business because of poor quality."

Kelly's eyebrows rose on his admission. "However, I have a letter I would like to show you. We have been named the first mainline American supplier to Kaga Motors' plant in Michigan. I have a letter here from the managing director in Tokyo I will share with you. In fact, I'll give you a copy if you promise not to show it to anyone until I can get express permission from Japan to give it to you." He took out the letter from his file and gave it to her.

She read it and let out a low whistle. "Mr. Fitzpatrick—"

Cliff interrupted. "Please call me Cliff. We're very informal here, and I tend to do a double-take and look for my father when someone says, 'Mister Fitzpatrick.' Will you?"

"Sure, and please call me Kelly. I don't think I'm letting down the bars too much. Anyway Cliff, if I understand this letter correctly, although you lost the Magna business on quality, that's the very basis on which you got the Kaga business. And with all due respect to our friends in Troy, Kaga would throw out what Magna terms 'commercially-acceptable quality' as totally unacceptable. What happened?"

Sandy entered the conversation. "Cliff Fitzpatrick happened. He junked a ton of old, unsalable product. There's a significant asset write-down I guess you didn't hear about, also. It's a write-off of finished goods inventory. He found that two of our ten production machines were incapable of producing parts within required tolerances and three others weren't a whole lot better. We had far more people inspecting than we had making. We don't any longer. We have had a huge employee layoff and almost took a strike that would have buried the company. Cliff persuaded the workers they could produce product every bit as good as the Japanese. The rest of the letter speaks for itself."

Cliff smiled at the two young women. "As usual, Sandy fails to mention her critical rôle in all of this. She is the one who spoke to the workers. The union president was certain the people were going to walk out. Sandy spoke to them as the owner, and they believed her. They voted to stay. I think the letter from Kaga speaks for itself.

"Incidentally, that's half of the lost Magna volume now and growing. The latest word is the new ring our guy made is going to become Kaga's standard, so there will also be royalty income we have never seen before."

"Could I go down to the factory floor?" Kelly asked. "When I visited several years ago, I was strongly discouraged from doing so."

"Of course! We would be delighted. I hope you don't mind wearing a hard hat? Oh ... there's something else. We've got coats for visitors, too." He looked at Sandy who went out and came back with a white coat with MURPHY in red capital letters across the back, and a neatly stitched badge saying Visitor on the breast. The hard hat was adjustable and from the way Kelly went to work to size it, this was a familiar process to her.

She noticed that Cliff and Sandy had their own coats with Fitzpatrick and Donnell lettered on them. Kelly decided that Sandy looked very good in her coat with the red hat that matched the lettering. She was impressed with the coats, both in terms of Sandy's appearance and because it suggested they often visited the shop floor. When they reached the floor, she was dazzled. Every worker was also wearing a MURPHY coat. Obviously there were three colors — workers, supervisors, and managers.

It was as smooth running as any manufacturing facility she had ever visited. The production machines looked brand new, and she could see where two new ones were being installed. There appeared to be substantial room for expansion.

Cliff pointed out a small quantity of Spanish-language packing materials, and then took her to the cafeteria. When they closed the door, the room was silent. Kelly noted that both Sandy and Cliff were greeted by first name by everyone. No one seemed at all impressed by the fact they were on the floor. Clearly, it was routine. They got coffee and took a table in the rear.

"We closed our dining room, so everyone eats here, now," Cliff told her.

"This is the nicest looking plant cafeteria I've ever seen!" Kelly said.

Sandy noticed that the girl looked hungry. "Kelly," she said, "do I detect skip-lunch-diet hunger pangs? If we don't feed you, you look like you'll eat the table, and I'm not sure if it's paid for yet."

The girl grinned and accepted the invitation. They went through the line again, because Sandy and Cliff hadn't eaten either. When they returned to their table, Kelly was even more impressed. "Who runs this place for you?" she asked.

"We do it ourselves," Cliff said. "We have an outstanding manager, Janet Simmons, who's been with us for years.

"Incidentally, I showed you the Spanish-language packaging. I'm going to tell you a competitive confidence. We have a new export sales manager who just returned from South America. He only returned this morning, and we're still totaling the orders he brought back with him. It appears, however, that we have enough business — paid in full, with accompanying irrevocable letters of credit — to increase our total sales volume significantly in spite of the loss of Magna. I mentioned it's in confidence. The confidence doesn't extend to the income effects, but I would just as soon not advertise to our competition how good Latin American business can be."

When they returned to the office, Kelly said, "Cliff, I'm impressed. What you're telling me is you have more than covered the loss of the Magna business, and, I infer, although neither of you said anything, at substantially higher margins. There's been an asset write-down, but that was junk, anyway.

"Would I be way off base if I guessed your costs are way down, too? For example, I don't see the normal piles of scrap lying around. I would guess your raw-material utilization is very high, and your rejects are very low. I would estimate you may be looking at a 10 percent pretax profit now. Would that be close?"

Sandy and Cliff looked at each other. Cliff shrugged and Sandy said, "If we think in terms of a reasonable range, I think you're in the ball park." Sandy continued, "Now, you mentioned our Stores Division. You're right, we did get rid of over two-thirds of our units. We got an excellent price for them, by and large. It seems they're worth a lot more to some other people than they were to us.

"The result is we plowed some of the money back into our Southern Division which is all we have left. We moved the buying function down to Charlotte for the division, changed our merchandise assortment, extended hours and renovated all the stores. Within sixty days, our sales per unit have tripled with profits up much more. The result is, Kelly, we haven't lost any sales from Stores to speak of, and are looking for substantially higher numbers next year. Our profits are ... very pleasant." Sandy finished her comments with a grin.

Kelly had been listening carefully and was now wide-eyed. "What I'm hearing is that miracles have occurred here at Murphy. You will have sales roughly even with last year or better, but with much higher profits. If nothing at all happens next year, sales will be up substantially. Moreover, I saw the new machines being put in place. That looks like a 20 percent capacity increase to me. By the way, you mentioned worn-out production equipment. That's the most un-worn-out stuff I have ever seen!"