No corporate president likes to tell shareholders that his company is losing money--especially when he is also the company’s major shareholder.
“If you know what you’re doing, you’re not supposed to lose money,” observed Paul E. Humphrey, founder, chief executive and major stockholder--with more than 50% of the stock--of Humphrey Inc., the San Diego-based manufacturer of gyroscopes and other guidance instruments that are used mainly in military and energy industry applications.
Despite his observation, Humphrey’s company did lose $453,974 in 1984.
During the first quarter of 1985, Humphrey stemmed the flow of red ink, reporting a $90,315 profit on sales of $2.2 million.
The company in 1984 was forced to spend “a lot of money,” Humphrey said, to upgrade the gyroscopes that help direct new high-speed target drones built by four major customers--Northrop, Canadair, Beech and the Israeli government.
The new gyroscopes will keep the drones competitive with new jet-fighter planes that easily outperform older models.
Humphrey’s contracts don’t normally all come up for review during one year. But by 1984, the target drones that the military used were no match for the new F-14, F-15 and F-16 fighter planes. The new drones, Humphrey said, can fly as fast and as hard as those planes, in part because they are guided by much more sensitive--and costly--precision gyroscopes. Achieving that sensitivity boosted the cost of producing the gyroscopes.
Some of Humphrey’s red ink was linked to qualification testing, which, in years gone by, was completed for about $25,000. Today’s more sophisticated testing costs about $250,000.
The company is now spending a great deal more time and effort on qualification testing, Humphrey said, because the military wants to see “proof of reliability. So we have to run tests. The most exaggerated one I’ve seen calls for 1,000 hours of vibration time.” The cost of using a testing facility runs about $120 per hour. To escape those charges, Humphrey spent $120,000 for its own testing equipment.
Humphrey said he did not mind spending money for stricter testing because it saves money for the company and customer. In fact, one of Humphrey’s first big orders (20 years ago, for about 1,000 gyroscopes worth $500 each) came about when a competitor couldn’t supply quality gyroscopes to a customer. Humphrey stepped in and filled the order.
“It used to be that you’d qualify on a design and build 100 gyros,” the 72-year-old executive said. “If one failed, and it failed badly enough, you might get them all back.”
Today, that kind of failure could mean going out of business. Humphrey acknowledged that failure would have been likely if the company had continued to sell its older products.
Although costs associated with the new product caused losses last year, Humphrey insisted that “you can’t quit. You get into something, and you have to finish it. The (new gyroscopes) will last another 10 years.”
Humphrey started in the gyroscope business during the 1940s, while working on guidance projects for the government’s missile systems.
“I went all across the country looking for gyroscopes, and no one was interested in building a special gyroscope.” He bought some parts from surplus and, during the next 2 1/2 years, built $300,000 worth of gyroscopes.
His fledgling company added a U.S. sales representative and, later, an overseas sales organization.
“Working at Convair, I could see what the needs were, (and I) could see right away there was a real market for gyroscopes to be put into the new missiles and aircraft,” he said.
Over the years, Humphrey has positioned itself well in the low end of the gyroscope industry--leaving the higher-tech aspects of the business to giants such as Honeywell.
Because of Humphrey’s dominance at the low end of the market, it almost always wins the contracts it seeks. If Northrop goes head to head with Beech for a new drone, Humphrey usually wins the gyroscope “because they’re both our customers, and they both have the same (military) specifications.”
Life isn’t as sweet on the non-military side of the business.
Although Humphrey joked that “oil drilling isn’t likely to go out of style for the next couple of hundred years,” the company is being hurt by the weak-spending oil-drilling industry. The industry, which uses Humphrey’s systems to guide drills, now accounts for only 20% of Humphrey’s business, down from 40% just two years ago.
Overseas business, which also accounted for 40% of Humphrey’s 1983 sales, fell to below 20% in 1984. While foreign sales are rebounding, Humphrey said, his company is sometimes stalled by federal regulations governing military-related sales overseas.
Although many of Humphrey’s gyroscopes bear a strong resemblance to those it sold 20 years ago, the company has its eye on the future: eventually, solid-state gyro systems and fiber-optics systems will replace the traditional gyroscope.
But it is a slowly changing industry. Humphrey will continue to build its mechanical gyroscopes for 600 to 700 drones that clients will order in the next seven years.
Advances in integrated circuits, however, are the biggest force for change. “They make it possible to solve problems that weren’t previously practical to solve,” Humphrey observed. “If mechanical gyros ever get forced out of business, integrated circuits would be the thing to do it.”