Profit Called Proof of Oak Turnaround
The last time Oak Industries reported a profit from continuing operations, Ronald Reagan was entering his second year in the White House and the San Diego Padres were still three years away from their 1984 National League pennant.
Reagan now has less than a year remaining in his second four-year term and the Padres are once again mired at the bottom of the National League West.
Rancho Bernardo-based Oak Industries last week reported a $3.4-million profit from operations for the first quarter ended March 31, ending a 24-quarter string of operating losses that dated back to 1981.
The electronic components manufacturer also reported a $771,000 net profit from continued operations. And total quarterly net income swelled to $3.4 million, thanks to one-time gains from the sale of Oak’s luxurious headquarters building and payments from the settlement of patent disputes.
According to company executives, Oak’s first quarterly operating profit since 1981 is tangible proof that the once-troubled firm is nearing the end of a turnaround that began in 1984 when former Wickes Co. Chairman E. L. McNeely became chairman of Oak.
That turnaround has been long and painful. But Oak, which generated $300 million in net losses between 1981 and 1987, bears little resemblance to the once high-flying media company that had its fingers in far-flung cable and broadcast TV businesses.
Executives have talked extensively about that turnaround--but they have stopped short of making detailed financial predictions.
“My predecessor got into some serious problems for making predictions,” McNeely said last week. “But I will say that we’ll make a (net) profit this year. I don’t think it’s a one-quarter thing.”
McNeely’s reference was to former Chairman Everitt A. Carter, who, according to federal investigators, defrauded Oak shareholders by lying on financial statements filed with the U. S. Securities and Exchange Commission.
A long-running federal investigation also alleged that, under Carter’s stewardship, corporate funds were used to buy condominiums, sports cars and a horse for Oak executives. Last November, Carter was indicted on charges that he filed tax returns in 1981 and 1982 that understated his income by nearly $157,000.
In 1981, when Oak was beginning its downward slide, McNeely was chairman and chief executive of Wickes Co., the financially troubled retail giant that entered federal bankruptcy court in 1982. McNeely resigned as chairman in 1982 rather than stay with the company during Chapter 11 proceedings.
In 1985, McNeely, who was then 66, said he saw his position at Oak as temporary and that the firm was actively beginning the search for his replacement. But, last Wednesday, McNeely agreed with the corporate board’s request that he remain for at least three more years.
“The board collared me (in Crystal Lake, Ill., where Oak was founded 57 years ago and where the company held its recent annual meeting) and told me that they wanted the continuity of having me around,” McNeely said.
Oak’s turnaround already has changed the company extensively:
It last year sold the lavish but unnecessary corporate headquarters building for an estimated $9 million. The company next week will move to a smaller suite of offices at a nearby Oak factory.
The company has reduced its corporate staff from a high of 315 in 1982 to just over 40. Only recently did the company begin to rebuild by attracting what McNeely described as “qualified high-level executives.”
However, Oak last week announced that Richard S. Kay, who was recently hired as chief financial officer, had left the company because of “philosophical differences.”
Oak has freed itself from a complicated web of civil lawsuits and SEC investigation that followed in Carter’s wake. A class-action suit filed by disgruntled shareholders resulted in about $25 million being disbursed to shareholders around the country.
In 1986, Oak convinced nearly 80% of the investors who held $230 million in Oak debentures to exchange their bonds for a combination of stock, notes and warrants. That restructuring cut Oak’s annual interest payments by $22 million.
Early in the turnaround, Oak sold off its TV stations in Los Angeles, Chicago and Florida. It also sold a troubled cable TV business in Los Angeles.
The remaining businesses--including the components division that generated $40 million of Oak’s $50.9 million in total first-quarter revenue--are profitable, according to McNeely. A cable TV converter business, although profitable, could prove to be the company’s weakest link.
“We’re selling the Cadillac of the business, and these days it’s a lot easier to be selling Fords,” McNeely said.
Industry analysts who dropped coverage of Oak when it was generating a seemingly non-stop flow of red ink now are beginning to take a second look at the company.
“Oak used to be a dog,” one analyst said last year. “It was a terrible company that was terribly run.”
Stock market forecaster Joe Granville, impressed with Oak’s recovery, last year added Oak to his list of the nation’s most undervalued stocks.
Oak was unchanged Monday at $1.25. It has been trading at about $1.25 for the past month.
Oak’s turnaround also has included the acquisition of several new businesses. It has acquired two electronics businesses and a company that manufactures railway maintenance equipment. All are now profitable, according to McNeely.
Further acquisitions are planned, but Oak has slowed its acquisition schedule because “it’s a seller’s market and we don’t want to pay prices being demanded,” according to McNeely.
Oak has the cash to buy new businesses because it sold its materials division to Allied-Signal in 1986 for $65 million. It hopes to buy additional profitable companies in order to utilize an accumulated $175 million in tax-loss carry-forwards.