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STADCO

by Eric Peterson on January 9, 2019, 03:19 pm MST

www.stadco.com

Los Angeles

Founded: 1941

Privately owned

Employees: 140 (95 in California, 45 at a second facility in Mexicali, Mexico)

Industry: Electronics & Aerospace

Products: Aerospace parts

COO Bob Parsi has helped steer the longstanding aerospace manufacturer back to profitability after a few turbulent years.

Parsi describes STADCO as a pure manufacturer. "We don't have intellectual property because we don't design products. We come as close as we can get [to having IP] with our know-how in manufacturing extremely complex parts." It would take other companies years to catch up on certain skill sets, he says.

STADCO was "founded around the war effort" during World War II, says Parsi. "After the war, they continued tooling." Then named Standard Tool and Die Company, the moniker was shortened to STADCO over the years. One thing hasn't changed: a sharp focus on complex parts for aircraft manufacturers. The company emphasizes manufacturing, and does not offer design services.

"STADCO was considered a machine shop, but not your typical machine shop," says Parsi. "Because of the complexity of the parts, we consider ourselves more than a machine shop."

For 30 years, the same basic business model prevailed. "The ownership was always looking to be at the top of their game," says Parsi. "They were one of the premiere machine shops in the country. . . . If you wanted something nobody else could do, you paid the price and came to STADCO." He says the company even had a waiting list of machinists who wanted to work for it at one time.

STADCO adapted as the aerospace industry changed. "In the '50s, as one segment of the industry slowed down, they would try something else," says Parsi, noting that the company made its own patented golf clubs for a while.

In the early 1980s, ownership changed when brothers Younes and Izak Parviz Nazarian bought the company. At the time, STADCO had several cost-plus contracts with the U.S. government. "The margins were very good and they benefited from that," he says. Younes was an early investor in Qualcomm, and STADCO became one of several priorities.

In the 1990s and 2000s, "The company kind of coasted and lost territory," says Parsi. The staff contracted from about 250 employees to 125.

Before the advent of 5-axis machining, "STADCO used their know-how to machine complex parts on 3-axis machining. In the early '90s, that changed. . . . The skill sets of the operators of the machines became less important."

As STADCO lost money and the value of its facility in downtown L.A. increased, the Nazarians brought in aerospace industry veteran Doug Paletz, now the company's CEO. "Doug had a turnaround plan," says Parsi. "I was part of that."

Implemented in 2004, STADCO was soon buoyed to profitability, and the Nazarians ultimately sold the company to Corinthian Capital in 2010.  "This was their first foray into aerospace," says Parsi of Corinthian. The initial strategy was hands-off, he says, but "private equity started tweaking our formula."

Both Paletz and Parsi left STADCO in the aftermath of the acquisition, but they returned to buy the then-flailing company back from Corinthian with help from investors in 2014. "After a lot of back and  forth, we ended up being the only viable company to buy STADCO," says Parsi. "It's been a hectic run ever since."

The pair instituted their second turnaround plan in as many decades, but a two-year timeline stretched to four. "Unfortunately, as much as we knew the business . . . the sellers were not forthright with a lot of data," says Parsi. "We ended up with a $2 million hit to our cash cushion, which made our turnaround much more challenging."

Revenue eclipsed $25 million before the 2010 sale, then dipped to $15 million in 2014. In 2018, STADCO "finally got to a point where we have accumulated the critical mass to push us to the other side and start making money," says Parsi, citing revenue of $20 million and forecasting a "good year" for 2019. "Because of our high fixed costs, we need to be higher than $20 milion to make money."

STADCO continues to gravitate to complex parts, and size is no object. "We were one of five companies selected by Boeing when they were developing the 787 Dreamliner." The 110-foot wing required a special skill set. "Only a few companies were capable of handling this big piece."

After the Challenger disaster, STADCO worked on NASA's Space Shuttle program to redevelop the rocket boosters and continued until 2005.

STADCO has manufactured gearboxes for Sikorsky Aircraft's CH-53 heavy-lift helicopters since the 1980s and is working on a new version for the upcoming CH-53K. "It's finally getting to low-rate production," says Parsi. "It's pretty much the darling of the Navy."

That's largely because of the issue with IEDs in Afghanistan, says Parsi. The U.S. military "had to go and get Russian helicopters at very expensive prices to help transport the troops," says Parsi.

The updated design represents a 15-year, $300 million contract starting in 2022. "We are pretty much banking on this," says Parsi. "We foreseeably can double the size we are today by 2023-24 through this one program."

Challenges: "The biggest challenge for us is the aging of the workforce," says Parsi. "Nobody wants to be in this business anymore." State and federal governments "are not promoting technical skills," he adds. "Most of our machinists make over $100,000 a year. They make good money, this is a good field, but we don't have any new blood."

Adapting to 3D printing is a hurdle on the horizon. "For the parts we do, it's at least 10 to 15 years away," says Parsi, "but eventually that's going to happen."

Opportunities: "We started a helicopter business unit," says Parsi. "We see that as huge growth potential for the company. We get calls daily from investors who want to invest in STADCO because they know of that program."

"We do mostly aerospace, but we do some other projects," says Parsi, highlighting work on the U.K. atomic weapons programs and the capsule for a deep-ocean submarine.

"Our bread and butter is in aerospace," he adds. "We do other things, but at the end of the day, we're an aerospace manufacturer." STADCO supplies jet engine parts to Rolls-Royce, and that kind of work could drive future growth, largely because of the complexity of the parts.

Needs: Parsi points to financing. "Cash is still a big challenge," he says. "Growth requires cash. . . . It requires investment in capital expenditures and things like that."

Equity investors are one possibility, but there's a hitch. "To fund the growth, because of several years of loss-making, our balance sheet is weak," he says. "Sometimes customers look at our balance sheet and are scared to put more work into STADCO."

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