An Interview With CompuDyne CEO Martin A. Roenigk

Martin A. Roenigk is chairman and CEO of CompuDyne (CDCY: NASDAQ), the Hanover, Md.-based company ranked #61 on Forbes Magazine’s list of the “200 Best Small Companies.” We caught up with Marty Roenigk at the ACA Winter Conference in Nashville where he talked to us about his company, changes within the industry, and new correctional products-including Maxwall, our last issue’s Product of the Month.

Jay Schneider: You have five businesses operating within three business segments. Can you briefly explain the role of each company?

Marty Roenigk: The three major thrusts for us are corrections, attack protection, and public safety-our core business is corrections, and that’s basically Norment, exclusive of Norshield. That core incorporates all of our corrections businesses, including our regional business offices. The regional office structure allows us to take national resources from a central standpoint in Montgomery, Alabama [Norment’s headquarters], resources such as capabilities and purchasing power, technologies, and human resources, and distribute them on a regional and local basis so customers get the best of both worlds-local presence and national resources. Then we have, within Norment, the products side that includes CorrLogic and the company’s software management systems; we bought the company from BI, Inc. in May 1999. CorrLogic has about 12 installations throughout the county and are currently trying to get several statewide contracts. It would be a major win for us if they get a statewide contract because we’d be able to tie together all of the prisons and jails within a state. We have a company called Quanta Systems Corp. that is an original part of CompuDyne. It has about $15-16 million in revenues primarily doing security work for the government. The work is intelligence-based and confidential, mostly because of where the work is done and not necessarily what work is being done. Quanta Systems goes back to 1950-it’s very steady and now growing quite nicely. We added some senior marketing people to the group about a year and a half ago and now we’re starting to see the results of that. And we have Norshield, which is part of the Norment Security Group but not in the corrections sector. It is the largest supplier of what I call high-end bullet glass and blast-resistant windows and doors-products very, very significant to the State Department and overseas embassies. Because of bombings in recent years and because of Madeline Albright’s and Bill Clinton’s increased spending on embassy security, that business is starting to grow for us. We also did most of the federal reserve buildings constructed within the last 10-12 years, some CIA buildings, and projects like that.

The Norshield products are very, very high end and there’s really no one that competes with us. The products are rated at security level eight and we are actually the only ones that have a level eight product; products rated on a scale of four or lower are pretty much what we call low end and anything above that is high-end. It’s a tough business because all products have to be tested; you blow up your own product to test how long it takes to get through a window or door and test with different ammunition as well as in a way that simulates a terrorist actually trying to break through the door.

We would like to expand this business and might make an acquisition or two in this area. And the other business we’re in-still relatively small right now, but promising-is SecurLan, a conglomeration of a couple of businesses, one is called Sysco and the other is Fiber SenSys, Inc., our newest acquisition. SecurLan provides physical protection for conduits for local area networks; people would be surprised by how easy it is to pull information out of a conduit without interrupting the flow of information. What SecurLan does is physically protect that conduit so that if someone tries to break into it, it tells you that something happened and it tells you approximately where it happened. It also shuts down the whole segment of the computer system so if information really is being stolen, no more can be taken. Systems of this type are now required for all government and military operations where confidential information flows through conduits.

It’s a rapidly growing business for us, with little competition, and is a very sophisticated product. That’s one of the reasons we acquired Fiber SenSys, the company was a critical supplier to us for the product and by acquiring it we now have control over an important element of the product. Fiber SenSys will become our security products distribution channel and SecurLan will be the major product going through there.

JS: You must be very proud of CompuDyne’s ranking on Forbes Magazine’s “200 Best Small Companies” list. What has made your company so successful during the last five years-the magazine’s evaluation period?

MR: I think it’s a combination of things. Back in 1995 we were pretty small and made an acquisition of Shorrock Electronics-the U.S. subsidiary of a British Company-and we did very well during that period. We grew very rapidly, both in revenues and earnings, and then in late 1998 we bought Norment from Apogee and that gave us another big spurt in revenues and earnings. Actually, that acquisition about quadrupled our size; we went from $25 million in revenues to $100 million in revenues. But, if you slice up the acquisition and look at the individual operations, such as Shorrock or Norment, they were both growing very rapidly on their own-organically-not because of the acquisitions. Putting the companies together also contributed to their growth and we’re really pleased about that.

CompuDyne should actually look even better next year because the first of those five years [the period Forbes uses to evaluate a company] wasn’t a very good year because we had an extraordinary item in there. This year we expect to be on Forbes’ list as well and might even have a higher ranking. [CompuDyne was ranked #61 in 2000]

JS: Where do you see the company in another five years?

MR: I don’t see why we can’t be a $400 to $500 million dollar company in five years. Last year we did about $132 million in revenues and this year, without an acquisition, we’ll do more than $150 million-maybe $160 million. We have a premier position in corrections and when we add our new Maxwall product-a prefabricated steel cell business-that could increase our share, or potential share, of the corrections market by, well, I don’t want to say it doubles it, but it could come close to doubling our share in the potential $400 to $450 million market.

Maxwall is now starting to roll out and we’re having some tremendous reception on that and so we think in 18 to 24 months that’s going to have a very real effect on our revenues. So, on the corrections side, we’ve already expanded our marketplace and are gaining market share and we’ve been growing very rapidly and there’s no reason why that business can’t keep growing at a 15-20 percent internal growth rate and probably even faster because of the Maxwall product.

We really want to go in three directions: corrections, where we already have the preeminent position by far, public safety, and integrated justice systems, which is our CorrLogic division. We plan on expanding that business rather dramatically this year, whether through acquisition or internal growth-more likely through acquisition. So, right now we’re big in corrections, growing and soon to be big in public safety, and eventually we want to get big in commercial security. High-end, heavy-duty, commercial security work, but we’ve barely started that.

But those areas give us lots room to grow and as I said, there’s no reason why we can’t be at $400-$500 million in five years and I’d be really disappointed if we weren’t.

JS: In what areas do you see drastic changes, if any?

MR: I can’t think of any area in our business that doesn’t have a lot of promise. We’re especially excited about corrections because it was doing so well before-taking market share because of its fully-integrated position, and we think, the best people in the industry-and now has all of the pieces together necessary to grow rapidly. In that market, we are by far the biggest and there are probably only about two other companies that can go after really big and complicated jobs and do them well.

We’re growing our existing business in corrections about 15-20 percent and so the core business has a great, great future and, when you add Maxwall-a totally flexible, two-inch-thick metal, hollow wall panel-it has just amazing potential. When you add a new product that seems tremendously advantageous and you have a built-in marketing, distribution, installation, and components infrastructure as well as credibility with architects and security consultants and their customers-nothing is ever a sure thing, but this sure looks pretty good.

JS: What happened in 1995 that almost brought the company to bankruptcy?

MR: It had made a very poor strategic decision in terms of the direction in which the company was going. In 1995, a partner and I owned a small manufacturing company in Connecticut and we were asked to get involved in CompuDyne because it was almost bankrupt. We came in, put some money in, pushed the company in the direction it ought to be going, and then starting making acquisitions. In 1995, when we did these mergers with CompuDyne, if we didn’t do them, in another six months it would have been bankrupt.

JS: How do you stage a comeback?

MR: Once we got rid of the existing bad operations, CompuDyne was doing fine, but on a very small scale. The acquisitions increased the scale.

JS: How long had the company been around?

MR: A long time. I know one of our businesses, Quanta Systems, just celebrated its 50th anniversary. Norment has been around since 1948. As for CompuDyne itself, I know it’s been a public company since at least the 1960s. It had at one time been a very large company then went down hill, selling off operations, and by the time we got involved it was quite small. Now it’s bigger and earning more money than it ever has.

JS: Is there a consolidation going on within the industry?

MR: To be quite frank, I think there are two different types of consolidation. I don’t like the idea of consolidation just for the sake of consolidation.

We could have a strategy of buying up a lot of little companies that are mini-Norments in different regions doing the same kinds of things we’re doing, but we really don’t feel we need to because we have all of the pieces together now and can do a job any place in the country. However, there are places where we would like to have additional regional offices, so if we find a real strong participant in a particular market where we’d like to have an office, we would think about acquiring them. Aside from that we’ve got everything we need. What we would like to do now on the corrections side is largely focus on internal growth because we have all of the components and because we’re taking market share. There are a couple of things we have in the backs of our heads that we’d still like to do-whether it’s products we don’t have or a market we’re not in yet-but there’s not a whole lot. We’re very well positioned for internal growth.

JS: How are your competitors reacting/planning for a consolidated industry?

MR: If you look around at our primary competitors, I really don’t see any of them doing very much in terms of acquisitions. I think there are companies that would like to try and model what we’re doing but I don’t think a lot of our competitors are doing it.

We are the dominant player and because of our regional offices and the networking we have, when we go after the much larger jobs, we really only have one competitor that we go head to head with and that’s Southern Steel. When you get into the types of projects our regional offices are going after-the smaller projects-I think companies see us as a real player in the smaller markets. We’re already the dominant player with the large projects and we want to be the dominant player with the small projects. Our internal growth allows us to go after smaller projects which is the reverse of what everyone else is trying to do. They want to grow their businesses and go after the big jobs, but I don’t see the pieces out there for them to do it. We have tremendous resources and, because of our scale, we can afford to have specialty knowledge and capabilities in a lot of areas allowing us to handle large projects. Now, we’re going in the other direction.

JS: How often do your companies introduce new products? How quickly are they brought to market?

MR: I really can’t answer that because it depends on the product. We’ve had Maxwall in development for close to a year now-which really isn’t a real long time for a major product-and we’re just now introducing it. It’s my impression that the corrections industry doesn’t change very fast, some people might see that as a negative, but I don’t. It’s a conservative industry and when you’re handling dangerous people you want to be careful about bringing in new technologies. It’s understandable that it takes a long time for the industry to adopt new technology.

We’re still working on a product we’ve had in development for six years, we’ve seen several generation of it, and I don’t have the exact numbers, but we’ve spent maybe a couple million dollars over the years developing this system. That’s something probably no one else in our end of the business can afford to do.

JS: Any products or services your companies introduced that were more successful than ever anticipated?

MR: Actually, Maxwall, gauging just from industry reaction. The response from architects, owners, and consultants who expressed interest in the product is far more incredible than for any other product we’ve launched. Another one, on a much smaller scale than Maxwall, is our CorrLogic division. The largest project CorrLogic did was San Diego and as part of the project they developed four or five new modules, one of which is institutional medical management. The company realized they had a system better than any other out there, so they introduced what is now called CorrMedica. Like Maxwall, that met with tremendous reception.

JS: Any products or services your companies introduced that you felt sure were winners-but weren’t?

MR: We’ve had a couple of cases on the product side-not on the corrections side. The products were imported from Europe and were good products, but the execution wasn’t so great. These are just small pockets of our business where we didn’t execute as well as we needed to on the marketing side. But, it wasn’t the failure of the product, rather the execution and we’re changing that now.

JS: What is the reaction from modular/precast companies now that your Maxwall product competes with them?

MR: We’ve always viewed them as sort of a competitor anyway because of the way they market their projects and products. They have actually taken work away from us because they are providing the furniture and other features that, say with a masonry project, we would typically provide. So, from that standpoint, they’ve already taken work away from us so to an extent we feel like we’re just taking the territory back. I don’t believe they really see us as a major threat.

What we see is an untapped modular market for smaller projects. The sub-300 cell projects that modular companies can’t really handle because their start up costs-getting their molds and forms setup-require them to spread their costs out. Obviously, in our marketing efforts, we will be trying to push our product for larger projects, but our focus is on the smaller projects.

JS: How is CompuDyne’s stock doing?

MR: One of our challenges is getting stock price up. Even though we’re the biggest in our industry, we’re still a pretty small company in the context of the stock market with a market capitalization of about $50 million. We think our stock is relatively cheap at about $8 per share but should be quite a bit higher than that. The stock doesn’t trade very much and there’s not a lot out there to be bought, but we’re now just starting a thorough outreach to prospective investors, institutions, and brokers to get people interested in our stock. It’s an important thing to us.

We’ve been putting together what I think is a spectacular record of rapidly increasing earnings and we don’t see a reason for that to slow down. Our earnings per share in 2000 were 60 cents and, with an adjustment to a tax reserve, went up to 69 cents. We’ve already announced our 2001 earnings will be 20 percent higher than last year’s; last year’s 60-cent shares were up from 46 cents in 1999. I think that the advantage we have is that we’re small enough to grow rapidly, we have leading positions in our markets, and we have great people, and we’re expanding our share of the markets.