American Standard Companies Inc.
American Standard Companies Inc.
Incorporated: 1929 as American Radiator & Standard Sanitary Corporation
Sales: $6.7 billion (1998)
Stock Exchanges: New York
Ticker Symbol: ASD
NAIC: 332998 Enameled Iron & Metal Sanitary Ware Manufacturing; 332913 Plumbing Fixture Fitting & Trim Manufacturing; 333415 Air-Conditioning & Warm Air Heating Equipment & Commercial & Industrial Refrigeration Equipment Manufacturing; 336211 Motor Vehicle Body Manufacturing; 339112 Surgical & Medical Instrument Manufacturing
American Standard Companies Inc. has its roots in the 19th century as a manufacturer of plumbing and heating products. It became the world leader in such staple items as toilets and radiators, diversified into a number of unrelated fields, and then gradually returned to its bread-and-butter industries. In the 1990s American Standard had three core businesses: 1) air conditioning products, which it gained through the 1984 acquisition of The Trane Company; 2) plumbing products, which develops and manufactures bathroom and kitchen fixtures and fittings under the brands American Standard, Ideal Standard, Standard, and Porcher; and 3) automotive products, which develops and manufactures commercial utility vehicle braking and control systems under the WABCO and Perrot brand names. Each of its core businesses occupies the number one or two position in its market. A fourth segment, the Medical Systems Group, was formed in 1997 to focus on new diagnostic technologies.
The early history of American Standard is bound closely to the figure of Clarence Mott Woolley, born in 1863 to a wealthy Detroit iron manufacturer. Forced to begin working at the age of 15 after the panic of 1873 wiped out his father’s fortune, Woolley by 1886 had become a successful salesman of wholesale crockery and had built personal savings of around $5,000, not an insignificant amount of money at that time. After investigating a number of promising businesses, in 1886 Woolley became a partner in the newly formed Michigan Radiator & Iron Company of Detroit, makers of cast iron radiators for residential and commercial heating systems. The cast iron radiator could be made far more cheaply than its steel predecessor, and Woolley correctly predicted that its advent would mark the beginning of the age of radiant heat.
In 1891 Michigan Radiator merged with the two other leading manufacturers of cast iron radiators, Detroit Radiator Company and the Pierce Steam Heating Company of Buffalo, New York. The merger was an early example of business consolidation and created a firm with yearly net income of $300,000 and a capital base of $8 million. As secretary and head of sales for the new American Radiator, Clarence Woolley, then only 28, soon proved himself an invaluable and tireless promoter of the company’s patented advances in radiant heat. An economic downturn, however, nearly snuffed out the new business in the 1890s. As the Depression of the mid-1890s deepened, Woolley recommended pursuing sales contacts he had made with foreign buyers at the 1893 Chicago World’s Fair. In 1894 he took the highly unusual step of traveling to Europe to peddle American Radiator products, and, much to the surprise of his skeptical fellow officers, came home with a suitcase full of orders. Thirty train carloads of American Radiator heaters were installed in the new Swiss capital building, and other major orders soon followed. The injection of fresh business kept American alive through the depression’s worst years and helped create the company’s strong European presence. Over the next 30 years, American added production facilities in many of the major European markets, and by the 1920s about 40 percent of its revenue was generated overseas.
Prospered Under Woolley’s Leadership: 1900–20s
In 1902, at age 39, Clarence Woolley was named president of American Radiator. From that date until Woolley’s retirement in 1938, American Radiator dominated the world heating market by carefully exploiting four basic strengths, as Fortune reported in April 1935. The first was the company’s sizable technological lead in cast iron equipment. Although its originally exclusive patents eventually expired, American’s head start and great size made it a fearsome competitor. In addition, Woolley saw to it that American spent lavishly on research and development—the second of the firm’s strengths. With far more capital than its nearest pursuers, American could afford to maintain its technical advantages even without the benefit of exclusive patents.
The company’s two other valuable resources were both vested in Woolley himself. By all accounts, Woolley was a consummate industrial salesman, able to drink with plumbers and sweet-talk corporate executives over dinner. American’s sales depended on the support of the master plumbers and builders, who both bought and installed heating systems across the country, and Woolley’s sales force knew the concerns and complaints of these men inside out. American’s fourth great strength was its president’s ability to forecast economic conditions, especially recessions. In 1907, for example, Woolley correctly deduced from soaring raw material prices the imminent arrival of another panic, and kept American’s inventories at near-zero levels to avoid having bulging warehouses in a dead economy. In 1915 he laid in an enormous stock of pig iron just before World War I drove up iron prices. It is estimated that this maneuver alone netted American some $2.5 million in savings.
The post-World War I boom economy pushed American’s income to around $10 million annually. Flush with success, Woolley built a spectacular new Manhattan headquarters for American; its black brick and gold roof quickly distinguished it as an architectural landmark. Just before the Depression, Woolley planned a merger for American, one that would have been a colossal achievement even in that merger-mad era. His plan was to unite four of the largest building products corporations in the country—H.W. Johns-Manville, Otis Elevator, Standard Sanitary, and American Radiator—into a single immense powerhouse, its unified sales force able to offer the contracting customer nearly everything needed. Woolley, however, was able to come to terms only with the Pittsburgh-based Standard Sanitary, the nation’s leading supplier of plumbing products. By mid-1929, the merger was concluded; American Radiator & Standard Sanitary Corporation (ARSS) finished that year with income of more than $20 million on sales of $187 million, as well as strong cash reserves with which to face the suddenly grim economic scene.
The Great Depression: 1930s
The Great Depression brought new construction to a dead stop, ruining Woolley’s plans for a new conglomerate. The anticipated big profits became big losses. In 1932 ARSS lost $6 million—easily the worst year in the company’s history. Although the firm had begun to break even by 1935, it was clear that all was not right in the black and gold tower. The 20-odd companies brought together by the 1929 merger had never been properly consolidated, and antagonism between the American and the Standard affiliates was growing. Friction became such that when one American outfit decided to build a warehouse next to a Standard facility, the latter promptly erected a fence around its property and forced American to put in a separate driveway for its own use.
The hostility was aggravated by American’s failure to hold up its end of the sales and profit agreement. American’s radiator sales were being seriously challenged by the new forced-air-furnace technique, and what little profit the company managed to make was generated in large part by its numerous European subsidiaries. The company’s overall lack of coordination eventually culminated in a confrontation between Woolley and Standard President Henry M. Reed, who pressed the 75-year-old Woolley to step down as chairman of the combined companies. Finally, in 1938, Woolley agreed, and Henry Reed became the new chief executive.
Reed wasted no time in simplifying ARSS’s tangled structure. He cut its 25 operating subsidiaries to 12. Top management underwent a similarly drastic winnowing. With a newly unified sales force, American’s performance was on the upswing until the outbreak of World War II in Europe, an event that presented a new set of problems. American had always relied on its strong and highly profitable European division for a disproportionate amount of its net income, but with Europe at war, the fate of American’s 16 overseas plants was suddenly in doubt. In addition, American’s domestic operations were suffering as a result of the growing popularity of “direct-to-you” stores, which bought plumbing and heating products in bulk and resold them directly to the consumer. Although direct retailing is now a standard practice, in the late 1930s it caused bitter controversy for those tradesmen and manufacturers who had a vested interest in the older system, in which all equipment was bought and installed by craftsmen. As the nation’s largest such manufacturer, ARSS was naturally concerned about this potentially momentous change in its customer mix.
American Standard believes that its business and global diversity, coupled with its market leading positions and high level of profitability, provide a solid foundation for consistent growth and superior financial returns.
As events unfolded, however, neither World War II nor the direct-to-you stores slowed American’s subsequent growth. The company suffered keenly from several years of lost European sales, but, at war’s end, the European affiliates were able to reassume their former dominance quickly. As for the direct stores, American generally stuck by its network of plumber-contractors, who did not fare as poorly as some had predicted. American also began to manufacture forced-air heating systems. Over many years, the company wound down its radiator-based business while adding additional forced-air capacity—and its natural counterpart, air conditioning.
Disappointing Performance After Postwar Prosperity: 1945–60
The post-World War II U.S. economy carried building products companies along with it. With the suburbs burgeoning and mortgages easily obtainable, the U.S. construction industry threw up record numbers of new homes across the country, each in need of plumbing and heating fixtures, supplied by ARSS. By the mid-1950s, ARSS was pushing $400 million in worldwide sales and continuing to score steady, if modest, profits. Around 1957, however, American entered a ten-year period of disappointing performance. Affected by rising raw material prices and a strongly unionized labor force, American’s earnings per share and dividends drifted downward. From 1955 to 1960 domestic sales at ARSS earned a thin two percent on the dollar. The bulk of corporate profits again were being provided by the company’s 20 European plants, which faced a less competitive market than U.S. operations.
Diversification and Expansion: 1960s
Around 1963 ARSS began a program of diversification that would occupy it for the next 15 years. By 1963, in addition to its traditional heating and plumbing lines, the company had branched into industrial controls, plastics, heat-transfer equipment, and nuclear reactor construction. This flurry of activity produced modest results, however; in 1965 sales of $553 million were only marginally higher than they had been in the late 1950s, and profit remained unacceptably low at three percent.
As a result two potential merger partners backed off after concluding that ARSS was too weak to purchase. The most serious of these suitors was Boise Cascade. One of that company’s executive vice-presidents, William D. Eberle, joined ARSS as its new president in 1966 and proceeded to turn the company around. In three years, Eberle more than doubled sales while decreasing the company’s dependence on the housing market by means of several major acquisitions. American bought Mosler Safe, a maker of security devices for the banking industry; Westinghouse Air Brake Company, a diversified manufacturer of equipment for the railroad, construction, and mining businesses; and William Lyon Homes, a California home builder. Eberle also changed the company’s name to American Standard to indicate its movement away from the heating and plumbing niche.
Cutbacks Improved Earnings: 1970s
By 1971 American Standard’s sales reached $1.4 billion, its employees numbered some 70,000, and industry analysts judged Eberle’s work a mess. By quickly expanding, Eberle had indeed reduced American’s dependence on the housing business, but at the cost of massive new debts, a confusing overlay of unrelated businesses, and plummeting earnings. In 1971 Eberle was shuffled out, and his successor, William Marquard, set aside $100 million on the balance sheet to defray the expected cost of undoing Eberle’s work. Marquard shut down inefficient plants, reduced employment by 20 percent, and sold off a number of the more extraneous divisions, using the proceeds to reduce debt and raise earnings. Marquard went further, however, easing American out of its original heating business while developing its railroad, truck brake, and mining equipment operations. By keeping only those companies that were efficient and profitable, Marquard built a far sturdier, more lucrative business. Although total sales remained steady at $1.6 billion for much of the decade, earnings per share skyrocketed from 1971’s $.11 to $5.25 in 1977.
Strengthened Core Businesses: 1980s
American was not yet finished with its housecleaning. During the 1980s the company completed its long retreat from Eberle’s diversified conglomerate to position itself as a relatively simple manufacturer of plumbing and air conditioning products. Under Chairman and CEO William Boyd, American Standard sold the Mosler security business and the various transportation companies. Though generally profitable, these outfits did not mesh well with American’s core businesses. American Standard’s only major acquisition during the 1980s did mesh, however. In 1983 American Standard purchased The Trane Company, the largest commercial air conditioning products company in the United States. With $833 million in sales, Trane made up some of the volume American Standard had lost to reorganization. By 1988 the once heterogeneous mix of companies at American Standard had been boiled down to three basic businesses: plumbing, air conditioning, and railway brake systems, together producing sales of about $3.4 billion.
Operated As a Private Company: 1988–95
In the October 1987 market crash, American Standard’s shares plunged to $35.25. That was when power tool manufacturer Black & Decker began its attempted hostile takeover, eventually making a tender offer of $56 per share in January 1988. After an attempted poison pill defense failed, American Standard was available to the highest bidder. Kelso & Co., an investment banking firm with ties to American Standard’s management, bid $78 a share, or 18.6 times American Standard’s 1987 earnings. It bought the company in April 1988 in a $3.2 billion leveraged buyout (LBO). Kelso formed ASI Holding Corporation to acquire and merge with American Standard. Egyptian-born Emmanuel Kampouris was named CEO. ASI would change its name to American Standard Companies, Inc. in 1994.
Following the LBO, American Standard’s long-term debt amounted to $2.7 billion, nearly 90 percent of the firm’s total capital. Kelso supplied $180 million of the firm’s equity capital for a 72 percent ownership share. A newly created ESOP (employee stock ownership plan) contributed $50 million, and the remaining $20 million came from 20 of American Standard’s officers.
Numerous restrictions were placed on American Standard’s ability to raise capital and sell assets. It was saddled with more than $250 million in annual interest payments, which would shrink earnings and possibly push the company into default if there was an economic downturn. To ease the foreign tax burden, about one-third of the LBO debt was placed in heavily taxed countries abroad.
Needing cash, the company was forced to sell its 64-year-old headquarters building in Manhattan for $43 million in August 1988. The company had to raise money to cover $500 million in debt due within two years, not to mention $1.55 billion that had to be repaid within eight years. In June 1988 the company floated an $825 million junk bond offering. It was clear that American Standard’s operations would not be sufficient to service the firm’s debt. Interest and amortization payments amounted to $325 million a year.
In addition to selling its headquarters building, American Standard was selling several of its businesses. A railway signal business was sold for $105 million. The company’s Steelcraft steel door business was being sold for more than $100 million. The railway braking products unit was sold in 1990. Tyler Refrigeration, the number two maker of frozen food display cases, was sold in 1991 to Kelso and a group of Tyler executives. Other businesses were also on the block.
American Standard sought to curb its cyclicality. Periodic recessions affected its bathroom fixture and steel door sales, and the railcar brake and signaling business was coming off a six-year streak of losses. ASI reduced the cyclicality of some of its businesses so it would be less affected by economic downturns. Notably, Trane gained strength in Europe and fortified its replacement business. A new line of color-coordinated luxury bathtubs, bidets, and toilets was also less dependent on new housing starts. Finally, the firm cut factory capacity in its depressed railcar brake business before selling it. In its advertising, ASI appealed to baby boomers who were interested in improving their kitchens and bathrooms at home.
In 1990 American Standard began improving all of its manufacturing processes through Total Quality Management (TQM) and something it called “demand flow manufacturing.” Instead of producing in long runs and large batches, demand flow manufacturing lines created a variety of items each day, keyed to direct customer orders. TQM was customer- and employee-oriented. TQM helped American Standard cut its inventories of both finished goods and raw materials, which helped improve the firm’s cash position and reduce its dependency on working capital. With the help of Chemical Bank, American Standard undertook a $ 1 billion refinancing program in 1993. Proceeds from the planned sale of senior subordinated notes and discount debentures would be used to retire higher-cost junk bonds.
All three of American Standard’s businesses were weakened by economic conditions in the early 1990s. A U.S. construction slump cut into sales of air conditioners and bathroom fixtures. A European recession affected the company’s largest automotive market for its truck and bus brakes.
American Standard’s demand flow manufacturing technique enabled the company to cut its inventories by 50 percent between 1990 and 1994. That helped improve cash flow by $60 million a year through savings on interest payments for supplies. An additional $40 million in extra cash flow was generated through refinancing at lower interest rates. The extra $100 million was used to expand the firm’s businesses by investing in China, the largest foreign producer of toilets and faucets, and a new joint venture with Rockwell to sell antilock brakes to Mack Truck.
Consistent Growth As a Public Company: 1995–99
By 1994 the company’s sales and earnings were growing in all three major business lines. It had acquired 70 percent of Deutsche Perrot-Bremsen’s automotive brake business in a joint venture, which helped build up the firm’s Belgian-based WABCO Automotive Products Group. Overall sales reached $4.5 billion. A public stock offering was planned, and the company went public in February 1995 with an initial public offering (IPO). In spite of six straight years of reported losses due to interest payments and the cost of switching to demand flow manufacturing, analysts praised the company, and the stock rose 36 percent in the first three months. They liked the fact that all three of American Standard’s businesses were making money and that all held the first or second position in market share. Operating income for the first quarter of 1995 was up 43 percent, and sales increased 24 percent. The company was globally diversified, and its management, led by Kampouris, was held in high esteem for adopting demand flow technology.
In 1997 American Standard established the Medical Systems Group as a new business to focus on new diagnostic technologies. Its proprietary diagnostic instrument, Copalis (Coupled Particle Light Scattering), allowed a user to perform multiple tests simultaneously on a single sample. It was approved for use by the U.S. Food and Drug Administration in 1996. Other diagnostic products included noninvasive methods of disease detection, such as the urea-breath test (UBT), and bundling blood virus, infectious disease, and autoimmune serological tests for the in vitro diagnostics industry.
Sales in 1997 reached the $6 billion level after American Standard rejected a $4 billion buyout bid from industrial conglomerate Tyco International Ltd. at the beginning of the year. In 1998 sales reached $6.7 billion. For the five years since American Standard re-emerged as a public company, its sales increased at a compound annual rate of 11 percent (excluding Medical Systems), and operating income (excluding special charges) grew at a compound annual rate of 20 percent. Approximately 50 percent of the company’s revenues came from overseas markets. With Wall Street nervous about global diversity as a result of financial crises in several Asian countries, the value of American Standard stock declined significantly in 1998, from a high around $48 to a low around $22. Management and employees owned about 25 percent of the firm’s outstanding stock.
American Standard’s three major businesses continued to claim the number one or number two positions in their markets. The company had several growth-enhancing strategies in place, including its leadership in demand flow technology. The company’s manufacturing operations were fully globalized, with 103 manufacturing plants in 34 countries at the end of 1998. That allowed it to shift high-labor content products to low-labor cost regions. As the company continued to retire its outstanding debt, interest payments would take less bite out of the firm’s growing operating income. That meant shareholders could begin to look forward to improved bottom-line returns.
The Trane Company; Société Trane (France); American Standard; World Standard Ltd. (Hong Kong); Ideal Standard (Belgium); American Standard Medical Systems; DiaSorin-USA; DiaSorin-Europe (Italy); Alimenterics Inc.
Principal Operating Units
Air Conditioning Products: Worldwide Applied Systems; International Unitary Systems (France); North American Unitary Products. Plumbing Products: Americas; Worldwide Fittings; Asia Pacific (Hong Kong); Europe (Belgium). Automotive Products: WABCO Automotive Products Group (Belgium). Medical Systems Group.
“American Radiator & Standard Sanitary Corp.,” Fortune, March 1940.
“American Standard Sells Subsidiary,” Nation’s Restaurant News, October 28, 1991, p. 64.
Barrier, Michael, “When ‘Just in Time’ Just Isn’t Enough,” Nation’s Business, November 1992, p. 30.
“Brake Business Sold,” Pittsburgh Business Times, March 19, 1990, p. 9.
Carey, David, “Life After Debt,” Financial World, October 18, 1988, p. 22.
Clifford, Mark, “Back to Basics,” Forbes, June 30, 1986, p. 56.
Dowling, Debra, “American Standard Cos. Rejects $4 Billion Buyout Bid,” Knight-Ridder/Tribune Business News, January 14, 1997.
Glain, Steve, “Top Toilet Makers from U.S. and Japan Vie for Chinese Market,” Wall Street Journal, December 19, 1996, p. Al.
Goodwin, William, “Chemical Launches American Standard Loan,” American Banker, April 23, 1993, p. 16.
“Heating Man,” Fortune, April 1935.
“How American Standard Cured Its Conglomeritis,” Business Week, September 28, 1974.
Kim, Jonathan, * “Bottom Fishing for These Four Depressed Stocks Can Net You Total Returns As High As 29%,” Money, January 1998, p. 58.
Lippert, Barbara, “After All the Bad Bathroom Ads, American Standard Is a Relief,” Adweek, June 5, 1989, p. 19.
Lucas, Allison, “Bringing Fun to Plumbing Products,” Sales and Marketing Management, October 1995, p. 116.
Nuelle, Frances, “The Man Who Put Working Capital to Work,” Chief Executive, October 1996, p. 40.
“Radiator Maker Starts to Swing,” Business Week, May 3, 1969.
Reingold, Jennifer, and John Kimelman, “Nerves of Steel: American Standard Has Negative Equity and a Ton of Debt, But Wall Street Loves It, and with Reason,” Financial World, May 23, 1995, p. 30.
Tully, Shawn, “Prophet of Zero Working Capital,” Fortune, June 13, 1994, p. 113.
Weber, Joseph, “American Standard Wises Up,” Business Week, November 18, 1996, p. 70.
—updated by David P. Bianco