Penril Corp. has fattened its bottom line by swallowing 14 firms in 12 years. Now, once again, the Rockville-based high-technology company has found a tasty morsel.
The company announced Friday that it had bought Alltest Inc., of Palatine, Ill., for $3 million in cash. Alltest, which makes computerized test instruments to spot troubles in autos, was consistent with Penril's other acquisitions. For despite its healthy appetite for other companies, Penril has proved to be a finicky eater: The firm that began its corporate life as a modem maker has a taste strictly for electronics companies.
Penril, founded in 1968, was "going nowhere" until it launched its program of acquisitions in 1973, according to Stanley Lanzet, an analyst with Drexel Burnham Lambert Inc. The company was founded by an engineer and salesman in their mid-20s who had worked for Rixon Inc., an electronics company in Silver Spring. The name was contrived by piecing together the first names of one of the cofounders, Merrill Solomon, and his wife Penelope.
They incorporated it in Ohio with seed money from its current chairman, Alva T. (Ted) Bonda, and Sen. Howard M. Metzenbaum (D-Ohio), then an attorney, who had been a partner with Bonda in other business ventures. Metzenbaum sold his interest in 1983.
In addition to modems -- devices that let computers communicate over telephone lines -- the fledgling firm developed "credit authorization terminals" to allow retailers to run computerized checks of credit cards. The credit terminal business began to flounder, and the company tapped a high-tech executive search firm to recruit a professional manager. The headhunters chose a man who had made a hobby of amateur-radio operation and a career in electronics: Kenneth M. Miller, then president and chief executive officer of Wilcox Electric Inc. in Kansas City, Mo.
Miller, who was named president, chief executive officer and a director of Penril in 1973, uncovered "a number of problems" at the firm. One major one was that it "had never made any money. In fact, it was losing quite a bit," he recalled.
"We were running $1 million a year in sales and we had expenses more appropriate for a company that had five times that number of sales," he said.
But Miller had a plan to help rectify that imbalance. Through acquisitions of entire product lines and of smaller, generally privately held, firms, he would multiply the company's sales. And it worked. Sales had increased by 65 times by fiscal 1984, which ended last July 31, when the firm reported revenue of $65.7 million.
Last year, Penril ranked 45th among the area's top 100 firms listed by The Washington Post; it now has 1,260 employes and plants in Connecticut, Massachusetts, Maryland, New York, Ohio, California, Mexico, Switzerland and Japan.
A company press release boasts that Penril posted its 47th consecutive quarter of profits in the second quarter of fiscal 1985, ended Jan. 31. In other words, it has made money since the first quarter of fiscal 1974.
After the relatively depressed years during 1981 to 1983, when the recession curbed its growth but didn't end its profitability, the company reported record earnings of $2.47 million in fiscal 1984 ($1.18 a share), up 71 percent from $1.45 million (72 cents) the previous fiscal year. Its revenue of $65.7 million was up 70 percent from $38.72 million.
Buoyed by earnings from recent acquisitions, Penril continued its record-breaking roll this fiscal year. It recently reported first-half revenue of $40.18 million, up 51 percent from $26.63 million during the same period last year, and earnings of $1.57 million (73 cents), up 47 percent from $1.06 million (52 cents) in the same period last year.
Miller anticipates earnings of $1.40 a share for the year -- in line with analysts' predictions of $1.40 to $1.50.
"Their expertise has been in making acquisitions that made business sense at reasonable prices. . . . They really have not made any bad acquisitions," said Drexel Burnham's Lanzet. "We like the company a great deal and think it's a super growth vehicle."
"They are a well-managed enterprise. Their president Miller is very good," concurred analyst David E. Nelson of Legg Mason Wood Walker Inc.
David L. Beeghly, an analyst with Offutt & Taylor Inc., contended that "with the two recent acquisitions Triplett Electrical Instrument Corp. and Concord Systems Inc. , which are probably the only good acquisitions they've made, profitability is the best it's ever been. It's a solid company. . . . When you think of Penril around this area, you think of a company growing because it bought other companies, but earnings were flat to nothing in the early 1980s."
Penril produces many products that, Miller acknowledged, "are not layman-familiar" -- although he notes with some satisfaction that "most of us know what modems are today." Miller confessed that "I've even felt on occasion that the company's name is a drawback. It has no relationship to anything -- the business we're in, the markets we're in."
He divides the firm's divisions into two broad categories -- consumer products and high-tech electronics.
The consumer side of the business includes Epicure Products Inc., a maker of home and car stereo speakers sold under the brand names "EPI" and "Epicure;" and Concord Systems Inc., which makes stereo radio receivers and cassette players for cars under the brand names "Concord" and "Westport."
Epicure, based in Newburyport, Mass., also is the sole distributor of European-made Thorens turntables in the United States. Concord's manufacturing plants are in Tarzana, Calif., and Yamatoshi, Japan.
Miller said Penril hoped to shield its earnings from recessions by acquiring high-quality consumer products, whose customers are likely to spend even during economic downturns.
The company's high-tech segments are:
Data Communications. Modems, Penril's original product, form the core of this division, based in Rockville and in Gaithersburg, where the firm recently opened a highly automated modem manufacturing plant. Customers include MCI Telecommunications Corp., which is using Penril's modems in its Electronic Mail service, and American Telephone & Telegraph Co., which provides Penril modems with its AT&T 3B2 computer.
Triplett Electrical Instrument Corp. Triplett, of Bluffton, Ohio, was an 80-year-old family-run enterprise when Penril acquired it in October 1983. The wholly owned subsidiary makes scientific test instruments used to monitor various manufacturing processes; for example, its telephone testers have been sold to AT&T and the seven Bell operating companies. Triplett, which will absorb the newly acquired Alltest, has plants in Oceanside, Calif., and Tijuana, Mexico.
Electro-Metrics Division. Based in Amsterdam, N.Y., Electro-Metrics makes a variety of test instruments that measure electro-magnetic interference (EMI) and electro-static discharge (ESD). Customers include manufacturers of computers and videocassette recorders, which must test compliance with Federal Communications Commission rules. The division last year landed a contract to test data processing equipment for compliance with the federal government's Tempest project, which aims to safeguard electronic national-security data from piracy.
Data-Tech Division. This Santa Ana, Calif., division produces test instruments and industrial process-control systems. A key product is machines that control moisture in goods ranging from film to potato chips.
Technipower Division. Technipower, with plants in Danbury, Conn., and Montreux, Switzerland, makes metal-encapsulated power supplies, half of which are certified to meet military specifications and are used in ships, aircraft and other weapons systems. The division custom-built a power supply for a NASA satellite deployed by the space shuttle last year. It also owns a line of autotransformers and voltage regulators marketed under the "Variac" trademark.
Although it now bills itself as a multinational company, Penril's sales abroad have plummeted nearly 50 percent because of the strong dollar, which allows foreign competitors to undercut its prices, Miller said. Exports now constitute between 8 and 10 percent of Penril's total sales.
A typical case in which Penril will win an overseas contract, he said, is if it has a product that "a foreign country needs at almost any price. For example, we sell the government of India a fair number of our interference analyzers. The only other sources are one other American company and a German company, and our products simply do the best. . . . "
One of the divisions -- Electro-Metrics -- has 50 percent of the U.S. market share for RFI test instruments, while the others have less than 10 percent in their various markets, Miller said. Consumer products generate about 30 percent of Penril's revenue -- a proportion Miller said he hopes to reduce with the recent takeover of Alltest and another acquisition the company hopes to make later this year in high-tech electronics.
Miller wouldn't rule out spinning off an acquisition -- a step Penril has avoided because it would have had too big an impact on total sales when the company was smaller, he said.
"The effect of any possible divestment should be to provide a perception from the investment community that we are more homogenous than we could be today," he said. "Probably the market today sees us as much more fractured than I'd like to have them view us."
The consumer side of the business "is the one the market would like to see us not be in," Miller said. Analysts, on the other hand, said they view the consumer electronics line as an asset.
Miller thinks it confuses investors.
"The investment community is confronted with how do you compare Penril with another company," he said. "When you're a mixed bag, it makes it more difficult for them to do that, and they sort of pull back and say, put a lower multiple price-earnings ratio on it. I think that's why Penril today is selling at $13 a share."
Considering that Penril's earnings are expected to be $1.40 a share in fiscal 1985, that makes the ratio of its price to its earnings only about nine, he said. "That's terrible. It really is, because we have had a consistent track record of profits."
However, that same "terribly" low stock price, combined with Penril's recent earnings, has attracted increasing attention from investment publications and analysts, who are recommending a "buy" on the stock. During an interview this month, Miller's secretary interrupted him with a note informing him that the company's stock, which is traded on the American Stock Exchange under the code "PNL," had just risen $1 to $13 because of a favorable cover story in Barron's.
Analysts say the stock's listing on the Amex, and the fact that it is thinly traded (it has about 2.11 million shares outstanding), are reasons for the low PE.
"Almost everything in technology has been under a cloud for a considerable while," said Lanzet. Penril "is not followed by a great many people. It's not your biggest trader," he added. "The Wall Street community tends to follow stocks that trade actively. Until Miller can increase float, he may not get the sponsorship he deserves."
Nelson said, "It's rather small, and there aren't a whole lot of shares outstanding, so we haven't done anything major about it. We'd have to buy the whole thing to get a real sizable position. But we have used the stock and liked it well."
Beeghly, of Offutt & Taylor, called the Amex "the unknown stock exchange. Money men don't have many favorites on it."
Penril, which was first publicly traded over the counter in 1972 and switched to the Amex in 1979, qualifies to list on the New York Stock Exchange, Miller said. He said the company and its board has discussed making the transition. But he said there are drawbacks -- particularly that "when the institutional investors, the real pros, in the NYSE think you have a future, the stock is hot. But when they dump you, the inverse happens, and it may cause the stock to fall."
Miller said a future stock offering to boost the number of shares outstanding is "a likely scenario," given the fact that Penril hopes to make another acquisition by the end of this year.
The firm has about $15 million remaining in a $25 million line of unsecured credit from Riggs National Bank and another $12 million left from an $18 million debenture offering in 1983.
"So what could happen is when we do our acquisitions, primarily for cash, we'll run up against a wall in regard to our ability to take on greater debt," Miller said. Proceeds from the stock offering would be used to pay down the debt and enhance the firm's borrowing power. In his scenario, Miller used a $20 million figure for the stock offering.
The relatively low price of the stock also makes Penril attractive to another group -- would-be acquirers. But the firm that has staked its strategy on friendly takeovers says it is not for sale.
"If we thought the company was essentially going to be flat in terms of financial performance, there'd be more attraction to selling it," Miller said.
Shark-repellent measures adopted two years ago include staggered terms for the board of directors and a provision that 85 percent of the shareholders approve any takeover offer. Miller and Bonda together own 20 percent of the stock, making that a foolproof defense.
Miller, who is paid $200,000 a year plus 2 percent of aftertax earnings, said his stock ownership is "probably a little on the high side," but that it will be diluted greatly in the next stock offering. But he said, "I hate to invest in companies where management does not own a part of it. The decisions are not as solid."
The biggest risks for Penril, Beeghly said, are "if they make a sour acquisition -- they've been lucky" with Triplett and Concord -- and if the economy takes a nosedive.
Beeghly said Penril is a solid company, but that "when you disregard Concord, it's a very mundane industry they're in. Their PE shows it. It's not glamorous. They fill orders. They don't make anything that's unique. They find something an AT&T or a Fortune 500 company needs and try to fill those niches.
"So when the economy's going, that's what makes Penril's business go. As soon as there's a recession, and the AT&Ts and GEs stop buying, Penril is the first to be hit."
However, he noted, the firm has insulated itself better against recessions with the latest acquisitions, particularly Concord, which he describes as "top of the line" stereo equipment that "goes into Mercedes-Benzes," whose customers' buying habits are little affected by recession.
"He's wrong" about Penril not making anything unique, Miller replied. "He doesn't understand the company. Speakers certainly aren't unique in themselves -- on that I'll agree with him. A modem is a modem, I suppose."
But Miller points to Penril products he says are unique -- such as custom-designed data-security systems, including those for Tempest.
"I think you could say that about almost anything that's produced, that there's nothing all that hot about it," he said. "You could say that about the computer industry today, the automobile industry. . . . They're all basically alike, four wheels, four tires and what have you."
As for the firm's vulnerability in a recession, Miller said that during the early '80s, "we didn't have growth, but we didn't have a dip. If he's suggesting that during the recession, we took a big downward swing, that's incorrect."
Miller acknowledged that "we do get hurt in the area of capital equipment," such as test instruments. But he said the effects lag a recession, because capital spending patterns don't coincide with economic cycles.
Penril also has cut labor costs to reduce its vulnerability. Its plant in Gaithersburg is highly automated. And although it has virtually no sales in Japan, it is using a Japanese subsidiary it gained in the Concord takeover to eliminate the middleman and negotiate better prices when it buys materials in the Far East.
"The Triplett Mexican plant is perhaps even more of a windfall," Miller said, because workers there are paid $40 for a six-day week. As a result, Penril has boosted the number of Mexican workers from 75 to 150 and will shut down Triplett's Oceanside, Calif., plant this month, moving its operations to the Ohio and Mexico plants.
Triplett ships circuit boards and components to Mexico, where they are assembled, and picks up the assembled boards on return trips to drop off more raw parts.
But Miller contends Penril's move into offshore production was mainly a byproduct of deals cut for other reasons, and not something the company is pursuing.
"We have to be very cautious about the political climate abroad . . . . And the fact of the matter is that a number of Penril's products don't lend themselves to being produced in low-cost-labor areas" because the parts cost a great deal more than the labor, he said.
And Penril rationalizes in recent literature for stockholders that the offshore plants create jobs for U.S. salespeople, engineers and technicians. "Remember, these are products which cannot be produced at a cost-competitive price in the U.S. Without these imported products, these American jobs would not exist."