July 10, 2009

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Sink or Swim

Experts Offer Tips to Keep Public Companies High and Dry

By Gretta Spendlove and Katie Peterson

July 10, 2009

The past year has been a wild ride for Utah’s public companies. Overstock.com stock has gyrated from $29 per share to $7 and back to $12. Headwaters Incorporated stock has moved from $16 to $1.22 to $5. Merit Medical Systems stock has bounced from $21 to $9.50 to $16, even though, as founder and CFO Kent Stanger states, “Our revenues haven’t dropped and we’ve continued the double digit growth which we’ve had nearly every quarter for 20 years. We can’t control the psychology of the market.” So, what are Utah’s public companies doing to survive now and position themselves for a rebound later? Getting Granular “Bad economic times force you to do the things you should do anyway,” says Patrick Byrne, CEO of Overstock.com, a major online retail sales company. “Bad times make you lean out your company and get granular about your expenses and return on investment.” For Overstock.com, “getting granular” includes doing a careful analysis of what products and customers are most profitable. “Two marketing channels may look the same,” Byrne says. “In both cases we may spend $6 million and get $100 million in revenue. But customers who come through one of the channels may be more likely to return, making that a more valuable marketing channel to pursue.” Another example of “getting granular” is measuring the real costs of serving the customer—analyzing why some products drive too many phone calls to the company. “We take underutilized resources and create valuable products,” says Kirk Benson, CEO of Headwaters, which is the largest U.S. marketer of fly ash, a coal byproduct. Fly ash is a major component of Portland cement, used in commercial construction. Headwaters is also a major producer of stone and other residential building products. “Two years ago, before the downturn, we started implementing lean manufacturing approaches, using Toyota production as our model,” says Benson. “In our current fiscal year, we identified $9 million in cost savings. Revenue is down, but our gross margin improved by more than 200 basis points.” In bad times and good, Benson and his management team search for and introduce production improvements, such as standardizing work processes and implementing the “Five S’s”—sort, store, shine, standardize, sustain. Those continuous improvements keep Headwaters competitive even when it is tied to a nose-diving construction industry. Product Launch Merit is the world leader in accessories for cardiology procedures (ex. the monitors, catheters, needles and guidewires for placing stents in veins and arteries). “Medical devices took a hit in the stock market when Obama talked about the uncertainty of health care reform,” says Stanger, “but otherwise we haven’t suffered much from the recession. Our products are almost recession-proof. We don’t sell capital equipment. We sell disposable equipment used for life-saving, essential procedures.” Stanger explains that the recession has taken the pressure off the tight job market and raw materials are cheaper—platinum costs less, and the cost of the plastics has dropped with the price of oil. Merit entered the recession with no debt and $35 million in cash. “We’ve always been conservative, and so we were in a position to buy up other companies which were hit by the credit crunch,” Stanger says. Merit recently acquired a company specializing in gastrointestinal medical devices. That acquisition gives Merit a profitable product line in a new market. Benson acknowledges that, for Headwaters, “New building products have done reasonably well even in the down cycle. We’ve invented some of those products and have acquired the intellectual property for others. Our synthetic slate has a 30 percent growth rate and we’ve just introduced a unique, colored trim board for houses.” SOS Staffing became a public company in 1995, but it went private in 2004. SOS, headquartered in Salt Lake City, touches two-thirds of the U.S. through branch offices and locations of client companies. “We provide the tools for businesses to shift their headcount when bad times loom, or when good times arrive,” says JoAnn Wagner, CEO. SOS provides temporary workers and helps companies manage lay-offs and out-placement. For SOS, as well as Merit and Headwaters, developing new products and streamlining existing ones is essential to survive tough times. “We’ve developed a hand-scanning device for the biometric reporting of time,” Wagner says. “It’s simple, accurate, but not as invasive as fingerprinting. It eliminates time clocks and time sheets, but still lets manufacturing clients move a work force from one project to another and know who was where, at what time, even if the HR department is in a far-away city.” “We’ve automated many of our processes that used to be manual,” says Wagner. “A person can apply electronically from their home, we do I-9 and skill verifications online, and we even do video interviews. With our own software developers, we have produced flexible programs to move our thousands of workers around the country or keep them in their own neighborhoods, and to make sure we have the right person in the right job.” Down to Basics “The more you sweat in peace time, the less you bleed in war,” says Byrne, adding that the present downturn is not as hard for him or for Overstock.com as it might be because, “I haven’t been sleeping well for three or four years. The company was going through its own growing pains, and we’ve already done a lot of the re-engineering that needed to be done.” Merit’s ample cash and lack of debt, acquired through discipline during good times, put it in a position to buy cheap assets of troubled companies when times turned bad. Similarly, the lean manufacturing principles of Headwaters, adopted before the recession hit, have limited its losses. “There’s a huge difference in managing a public and a private company during tough economic times,” Wagner says. She has served as CEO while SOS was both public and private. “In tough times a CEO of a public company has to focus on shareholders and banks. A CEO of a private company can spend more time with key clients.” Lynn Robinson, SOS V.P. of marketing, who has worked with Wagner since 2000, concurs: “In a publicly held company in difficult times, my access to the CEO and CFO was much more limited. The reaction time, from the moment a plan is created until it is executed, is much shorter with a privately held company, since there are fewer layers to get approvals from. In tough economic times, reaction time can be critical.” Benson agrees that bad economic times are hard for everyone when a company is publicly held. “All those folks expect you to do well. There’s a constant effort to do investor relations, to communicate with shareholders.” Stanger adds that there is a cost to being a public company, particularly in tough economic times, but he contends that the cost is justified by increased access to capital and liquidity of stock. “You can offer employees and owners stock options that they can actually sell,” he says. “Staffing services often feel an upturn before other industries do,” says Wagner. “The layoffs we are seeing now are not as severe, and some industries, such as refinancing and mortgaging, are picking up.” As Utah’s public companies emerge from the recession, the innovative products and management techniques gained during hard times will form the foundation for the next boom cycle.
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