WHITEFISH, MT / June 3rd, 2014 / Sterling Consolidated Corp. (STCC) has established an impressive track record of consistent profitability over the last four decades, with only one year of unprofitability, having grown the business from around $1M to over $7M in revenues. STCC stands today as one of the top independent U.S. hydraulic and pneumatic o-ring and seal distributors via their wholly-owned Sterling Seal and Supply subsidiary, which currently has five East Coast locations.
Sterling's primary growth strategy is focused on consolidating 100 highly profitable regional distributors within the U.S. These targets represent a large chunk of the market and, unlike STCC, often specialize in only certain types of rubber or certain industries. Many of these smaller operators, generating between $500k to $5M in sales, have been in the game for several decades and are now looking to retire. The company's strategy to acquire and streamline these businesses, implement the latest technology in order to maximize efficiency, readily addresses a target-rich environment.
In addition to this core business unit, STCC maintains a wholly-owned freight forwarding subsidiary, Integrity Cargo, LLC, which has solid standalone profitability and is essentially a revenue generator with about 30 accounts, the biggest being Sterling itself. This entity is advantageous because it allows the Company to improve efficiency and provide better service to its customers. The company also has three primary real estate properties used to generate revenue via tenants, conduct operations, and warehouse an impressively broad array of products so customer demand can be met in a timely fashion. The first two properties are the main 28k square foot warehouse and office complex in Neptune, New Jersey and another 10k sq. ft. facility in Cliffwood Beach, NJ, both of which are owned by STCC's real estate holding subsidiary, ADDR Properties, LLC. The third property is a smaller 5k sq. ft. office and industrial facility in Apopka, Florida, held by Q5 Ventures, LLC, another of STCC's subsidiaries.
The ubiquity of o-rings, which are used by some of the biggest companies on the planet, like Emerson Electric (EMR) and Ford (NYSE:F), as well as their manifold applications across numerous sectors, from after-market automotive, to electronics, energy recovery, mining, pumps/valves, and even aerospace, means there is a massive amount of future growth and potential momentum for Sterling's roll-up strategy. With lots of opportunities for consolidation in this highly fragmented industry, STCC's aggressive acquisition strategy makes a great deal of sense. It elegantly mirrors that of Hercules Sealing Products, a division of Diploma PLC, which utilized a similar geographically distributed acquisition strategy and now generates over $225M in revenue. The industry is comprised of either major players like Applied Industrial Technologies (AIT) with a $2B market cap, smaller entrenched private companies like Hercules, or mom and pop distributors that are ripe for acquisition by STCC.
Sterling has secured two acquisitions since going public in April 2013 under the guidance of Madison Park Advisors. Recently, the company issued a term sheet to a regional firm that would increase the combined revenue to $10 million. The acquisition committee has reviewed another 10 targets, which are currently in early stage negotiations. STCC is confident that they will continue to close a few more acquisitions, from this set within the next year.
Notably, no one else operating in this industry in the $1M to $10M range has comparably sophisticated management as STCC. With heavy-hitters on deck like former CPA for Goldman Sachs (as well as Ernst & Young), Scott Chichester, and 35-year sales and marketing veteran, John Magoulis (who is well-connected with acquisition target management throughout the industry), STCC has the lineup to deliver winning results for all stakeholders. Sterling brings a deep-bench of talent, improved supply chain metrics, logistical reach and expertise within the industry to the table when negotiating with owners of acquisition targets. Acquisition target employees have also been very receptive, especially the top people, because they get better benefits and overall operational efficiency. For instance, STCC brought both recent acquisitions full Automatic Data Processing (ADP) administration and healthcare coverage.
Sales in this industry are mostly a regional affair and the company's western Pennsylvania location, R.G. Sales, is a good example of this regionality, as their customer base consists largely of miners. This underlying regionality, driven and reinforced by logistical constraints, as well as product mix concentration due to specificity of the local customer base, makes STCC's approach quite compelling. Such end-market regionality is further exemplified by STCC's North Carolina operation, where the customer base is mostly automotive. This regionality also enables the company to fight off competition easily, using their ability to visit customers and provide superior on-site support and customer to their advantage. The West Coast, Midwest and Southeast markets all present major target areas for Sterling. If the company can lock down a presence in these key locations, they will be able to cover the whole continental U.S. with efficient one-day UPS shipping.
Most of the 3,000-plus customers STCC currently sells o-rings to using their industry-specific distribution centers also buy washers, gaskets and other similar items from China and international markets. This fact allows the company to exploit existing Integrity Cargo supply chain capabilities in order to offer customers bundled shipping, ultimately resulting in lower costs and a tidy profit for STCC. The company has also already done the hard leg work of sifting through the hundreds of available suppliers in China/Taiwan, establishing relationships with the best of the best and honing their supply chain down to the point where they source specific product categories from specific factories where quality has been verified. Moreover, these supply chain capabilities provide STCC with a perfect means of growing their o-ring business and overall product line.
When the company was still private they did a "friends and family" raise to the tune of around $278k at $0.30/share, creating a core group of insiders that are in it for the long-term and who are still on board to this day. In addition, the SurePoint Capital investment agreement, entered into in May of 2013, where SurePoint committed to purchase up to $1M in stock over 24 months, represents a very friendly, gentle credit facility, designed by Madison Park Advisors to increase basic working capital to around $0.5M in support of the company's going public. This is a shrewd strategy from Madison Park, which creates a working capital foundation to facilitate future engagements of an investment bank by STCC, if/when they move to create a larger credit facility to support additional acquisitions.
Sterling has been able to borrow large sums at extremely low rates, clearly telegraphing to markets the health and financial stability of their operations. Madison Park Advisors arranged and negotiated a $2.45M senior secured note from Customers Bancorp in October of 2013 on extremely favorable terms, with a stepped-up $1.25M credit line (variable initial rate of 3.75%), as well as a $1.2M commercial mortgage on its main warehouse in NJ (rate of 4.5% termed out over five years, roughly $4k a month). This financing has allowed the company to jump-start their roll-up acquisition strategy, but the emphasis has now switched to employing capital markets for future raises. A bankable loan at superb interest rates, combined with raw operational profitability in what is a growing OTC Market-traded stock, really throws a spotlight on STCC and investors should take note.
When the company went public in April-May of 2013, after essentially exhausting their growth potential as a private company, revenues were roughly $5.7M while pulling down operational numbers akin to 2012. The new acquisitions should put the company at a run-rate of around $10M. Plans are to go after another acquisition target following the pending acquisition's completion and then likely up-list. Engagements have already been made with an investment bank specializing in finding and handling OTCBB companies that want to list on a higher exchange.
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SOURCE: Emerging Growth LLC